US Real Estate Recovery

All values in US dollars unless otherwise noted.
Priced as of prior trading day's market close, ET (unless otherwise noted).

For Required Equity Conflicts Disclosures, see page 80.
RBC Capital Markets, LLC
May 2, 2014
The US Real Estate Recovery: A Cross-Sector Analysis of the
Real Estate Cycle
Executive Summary
This report provides investors with a cross-industry analysis of the impact the ongoing recovery in US residential and
commercial real estate markets will have on the sectors and companies covered by RBC Capital Markets Equity Research
Department. The report answers two central investor questions: 1) Where are we in the real estate recovery cycle? 2) What
sectors and companies will be favorably impacted by the multi-year recovery that is underway in the real estate markets
around the US?
The report focuses on those sectors and sub-sectors in our coverage universe that we believe are most levered to an
improvement in US real estate end markets: Commercial Banks, Home Builders and Building Products, Equipment Rental
Companies, Machinery Equipment Manufacturers, Home Improvement Retailers, Real Estate Brokers and select Multi-
Industry plays. While all of our sector analysts contributing to the piece believe broadly that the real estate sector will
continue to have a multi-year recovery due to increasing consumer demand, recovering commercial end markets, persistent
levels of affordability, favorable supply-demand dynamics and convincing historical precedence, there are some notable
differences in views with respect to the slope and magnitude of the recovery. In the report, each of our respective sector
analysts provide their own view of the real estate cycle and its specific impacts on their covered companies.
Before delving into the sector and single stock analysis that forms the body of the piece, our Home Building and Building Products
Analyst, Bob Wetenhall, provides our working economic assumptions and provides an overarching macro evaluation of the real
estate cycle that serves as the firms baseline view. Our US Banks Strategist Gerard Cassidy builds on this view by making a case
for a significant long term recovery in US real estate spending based on a rigorous analysis of real estate as a contribution to GDP
relative to prior cycles. Gerards macro section serves a bull case template for the present post-Financial Crisis cycle.
Exhibit 1 on the following page provides a snapshot of our real estate end market views as well as providing our top long ideas
in each of our represented sectors. As always, we encourage you to reach our to our analysts for further dialogue on their
investment ideas.
Table of Contents
Summary Recommendations ................................................. 2
Improving Fundamentals ........................................................ 3
Robert Wetenhall (Analyst) (212) 618-3251;
robert.wetenhall@rbccm.com
New Residential Construction ................................................ 4
Robert Wetenhall
Forecasting Housing Starts ..................................................... 5
Robert Wetenhall
Commercial Construction ..................................................... 11
Robert Wetenhall
Real Estate Sector Impact to GDP ......................................... 14
Gerard Cassidy (Analyst) (207) 780-1554;
gerard.cassidy@rbccm.com
The Long View: A Blueprint for a Multi-Year Recovery ....... 18
Gerard Cassidy
Building Products & Home Builders ..................................... 38
Robert Wetenhall
US Commercial Banks ........................................................... 43
Gerard Cassidy
Machinery.............................................................................. 47
Seth Weber (Analyst) (212) 618-7545;
seth.weber@rbccm.com
Home Improvement .............................................................. 53
Scot Ciccarelli (Analyst) (212) 428-6402;
scot.ciccarelli@rbccm.com
Business, Information and Professional Services
Residential Real Estate Brokerage ........................................ 66
Sun-Il (Sean) Kim (Analyst) (212) 428-2363;
sean.kim@rbccm.com
Electrical Equipment/Multi-Industry .................................... 71
Jamie Sullivan, CFA (Analyst) (212) 428-6465;
jamie.sullivan@rbccm.com
Companies Mentioned.......................................................... 79
The US Real Estate Recovery: A Cross-Sector Analysis of the Real Estate Cycle

May 2, 2014 2
Summary Recommendations
Exhibit 1:
End Market Market Commentary Stock Recommendations
New Residential Construction
RBC Sentiment: Positive
The combination of low interest rates and limited inventory
has led to a modest improvement in the housing market with
starts expected to rise by 8% to 1.0 MM in 2014 (RBCe).
Dislocation in the job market that impedes household
formation explains the absence of the first-time homebuyer
and is the primary headwind limiting the pace of the
recovery. We expect that the housing market will experience
a protracted recovery over the next three years with starts
rising to 1.2 MM in 2016.
Homebuilders: BRP, KBH, LEN, PHM.
Commercial Banks: BAC, JPM, KEY,
MTB, PNC, STI, TCB, WFC.
Real Estate Brokers: RLGY, RMAX.
Residential Repair & Remodel
RBC Sentiment: Positive
Sharply higher prices for residential real estate and elevated
equity markets have unlocked pent-up consumer demand.
We expect that private fixed residential investment (PFRI),
our preferred measure for tracking R&R spending levels, will
increase by 6% in 2014. Big box retailers and their suppliers
are well positioned to benefit from this powerful trend.
Hardline Retailers: HD.
Building Products: FBHS, MAS, MHK.
Commercial Construction
RBC Sentiment:
Neutral / Positive
Misleading reads from the Architectural Billings Index and the
perpetually optimistic Dodge construction forecast would
suggest that non-residential construction has sharply
accelerated. In reality, we think that private-sector activity
(retail, office, and industrial) has modestly improved while
public-sector investment (healthcare and education) remains
subdued due to budget constraints.
Equipment Rental: URI, HEES.
Machinery OEM: MTW.
Commercial Banks: HOMB, PNC,
UMPQ, WAL, ZION.
Building Products: CBPX.
Infrastructure Spending
RBC Sentiment:
Neutral / Positive
Recent data from the US Census Bureau suggest that
spending on highways and streets accelerated in 2H13
following disappointing trends in 1H13. We expect that
improving municipal finances will lead to a modest increase
(+5%) in spending on highways and streets in 2014. Increased
new residential construction activity should also lead to
increased demand for water infrastructure from
municipalities.
Machinery OEM: MWA.
Multi Industry: EMR, FLS.
Aggregates: VMC.
Source: RBC Capital Markets


May 2, 2014 3
Improving Fundamentals
Robert Wetenhall (Analyst) (212) 618-3251; robert.wetenhall@rbccm.com
RBC Economics is forecasting GDP growth of 2.5%, unemployment of 6.4%, and a yield of
3.6% for the 10-year UST by the end of 2014. Our multi-year base case outlook for these
factors is provided below.
GDP outlook: Economic growth should accelerate, driven by increased consumer
spending, modest gains in non-residential investment activity, and stable government
spending trends that represented a drag on growth in 2013. Accordingly, our revised
forecast calls for GDP growth of 2.5% (2014), and 2.6% (2015).
Unemployment: We expect that modest acceleration in GDP growth will result in a
firmer labor market with unemployment declining to 6.4% by the end of 2014. Although
headline unemployment numbers suggest improvement in the labor market, our
enthusiasm is tempered by concerns about declines in the labor participation rate and
the quality of jobs that are being created, which tend to be in low-wage service
industries like fast food and retail. Our revised forecast calls for unemployment of 6.4%
(2014), and 5.7% (2015).
10-Year UST yield: The implementation of tapering means that the yield on the 10-year
UST will probably rise to 3.6% by the end of 2014. This still implies a high level of housing
affordability on a historical basis. Low yields should also support increased commercial
construction activity. The persistence of exceptionally low short-term rates also limits
the amount by which the yield on the 10-year UST can rise. Looking out into 2015 and
2016, we think that marginally higher yields would imply a faster pace of economic
expansion, continued strengthening in the labor market, and increased consumer
confidence. Accordingly, this represents a potential tailwind for construction spending
that could offset higher financing costs. Our forecast calls for a year-end yield on the 10-
year UST of 3.6% (2014), and 4.2% (2015).


May 2, 2014 4
New Residential Construction
Robert Wetenhall
Housing market headwinds imply protracted recovery
The combination of low interest rates and limited inventory has led to a modest
improvement in the housing market with starts expected to rise by 8% to 1.0 MM in 2014
(RBCe). In our opinion, dislocation in the labor market, which is impeding household
formation, explains the absence of the first-time homebuyer and is the primary headwind
limiting the pace of the recovery. We expect that the housing market will experience a
protracted recovery over the next three years with starts rising to 1.2 MM in 2016.
Exhibit 2: Historical and forecasted housing starts (in thousands)
781
925
1,000
1,100
1,200
1,400
550
2,100
0
250
500
750
1,000
1,250
1,500
1,750
2,000
2,250
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14E 15E 16E
Housing Starts Average Since 1991 2009 Trough 2005 Peak

Source: US Census Bureau and RBC Capital Markets estimates

May 2, 2014 5
Forecasting Housing Starts
Robert Wetenhall
Our supply/demand model of the housing market forecasts housing starts by making
assumptions about the pace at which vacancies are absorbed. From 1991 to 2001, (year-
round) vacancies accounted for 8.5% of the nations housing inventory, on average. In our
opinion, this time period represents a comparatively normalized environment relative to
todays housing market, which is still recovering from the effect of the most recent financial
crisis. Weak absorption rates and high levels of supply resulted in vacancy rates peaking at
10.9% in 2009. Subsequently, improving demand attributable to population growth and
speculative investment coupled with limited incremental supply have resulted in vacancy
rates gradually trending back toward normalized levels. We note, however, that demand for
housing is not uniform across the country with states like California, Florida, and Texas
experiencing robust demand while states in the Northeast and Midwest continue to
experience declining populations. Accordingly, housing starts could continue to increase
even though vacancy rates remain elevated due to limited supply in the fastest-growing
markets. Our models assumptions are provided below:
1) Population growth: According to the US Census Bureau, the current US resident
population is nearly 317 million and is expected to grow by around 2.5 million people
per year (approximately 0.8%). We expect that the US population will rise to nearly 325
million by 2016.
2) Average household size: The average household size is approximately 2.759 people. This
represents a material increase from 2.700 people prior to the recession in response to
persistently high levels of unemployment among the 18 to 34 cohort. We expect that
the average household size will remain fairly stable due to continued dislocation in the
labor market.
3) Total households: There are currently 114.9 million households. We expect that the
total number of households will rise to 117.7 million by 2016.
4) Total housing inventory units: The current housing stock is comprised of 132.9 million
units. We expect that the total housing inventory will rise to 135.1 million units by 2016.
5) Total housing inventory mix: There are currently 132.9 million homes that can be split
among occupied (114.9 million units | 86.5%), seasonal homes (4.4 million units | 3.3%),
and vacant homes (13.6 million | 10.2%).
6) Vacancy rates: The average vacancy rate from 1991 to 2001 was 8.5% compared with a
vacancy rate today of 10.2%. We expect that the vacancy rate will gradually trend toward
its long-term average but believe that it will remain elevated due to migration from low-
growth states in the Northeast and Midwest toward California, Florida, and Texas.
7) Incremental demand household formation: We assume that household formation will
increase from 266,000 in 2013 to 1.0 million in 2016, which is below the long-run
average of 1.2 million. The most important factor in household formation is population
growth. Household formation should also benefit from a stronger economy
accompanied by higher employment levels.
8) Incremental supply: We calculate the average number of housing starts from each two-
year period on a rolling basis to estimate the number of completions in the current year.
This provides an incremental supply figure, which is then adjusted lower to account for
homes that are demolished (average of around 300,000 units annually).
9) Net absorption rate: The delta between incremental demand and supply is calculated
for the purpose of determining the change in vacant inventory levels.
10) Vacant inventory levels: The amount of vacant inventory at the start of the year is
adjusted for the number of units that are absorbed during the course of the year in
order to calculate ending inventory levels.


May 2, 2014 6
Exhibit 3: Housing model summary
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E
Households
[1] U.S. Popul ati on (i n mi l l i ons) 286.3 289.0 291.6 294.3 297.0 299.9 302.9 305.6 308.2 310.4 312.6 314.9 317.1 319.6 322.1 324.5
[2] Average Househol d Si ze 2.734 2.733 2.738 2.706 2.693 2.700 2.711 2.733 2.740 2.738 2.745 2.746 2.759 2.760 2.759 2.757
[3] Total Households (in 000's) 104,698 105,759 106,505 108,735 110,281 111,096 111,723 111,823 112,485 113,357 113,871 114,698 114,964 115,797 116,710 117,715
Housing Inventory Mix
Owner Occupi ed 71,230 72,187 73,091 75,233 76,119 76,544 75,720 75,465 75,537 75,359 75,175 74,995 74,946 75,168 75,436 75,759
Renter Occupi ed 33,468 33,572 33,414 33,502 34,162 34,552 36,003 36,358 36,948 37,998 38,696 39,703 40,018 45,051 45,696 46,378
Total Occupied 104,698 105,759 106,505 108,735 110,281 111,096 111,723 111,823 112,485 113,357 113,871 114,698 114,964 115,797 116,710 117,715
Seasonal Homes 3,328 3,556 3,773 3,557 3,812 4,088 4,483 4,796 4,658 4,329 4,503 4,317 4,422 4,422 4,422 4,422
Vacant Inventory (Year-Round) 10,609 11,035 11,882 11,804 12,012 12,806 13,428 14,177 14,348 14,208 13,851 13,557 13,550 13,347 13,150 12,960
[4] Total Housing Inventory 118,635 120,350 122,160 124,096 126,105 127,990 129,634 130,796 131,491 131,894 132,225 132,572 132,936 133,566 134,282 135,096
Owner Occupi ed Housi ng as %of Total 60.0% 60.0% 59.8% 60.6% 60.4% 59.8% 58.4% 57.7% 57.4% 57.1% 56.9% 56.6% 56.4% 56.3% 56.2% 56.1%
Renter Occupi ed Housi ng as %of Total 28.2% 27.9% 27.4% 27.0% 27.1% 27.0% 27.8% 27.8% 28.1% 28.8% 29.3% 29.9% 30.1% 33.7% 34.0% 34.3%
Total Occupied Housing 88.3% 87.9% 87.2% 87.6% 87.5% 86.8% 86.2% 85.5% 85.5% 85.9% 86.1% 86.5% 86.5% 90.0% 90.2% 90.4%
Seasonal as %of Total 2.8% 3.0% 3.1% 2.9% 3.0% 3.2% 3.5% 3.7% 3.5% 3.3% 3.4% 3.3% 3.3% 3.3% 3.3% 3.3%
Vacancy Rate (Year-Round) 8.9% 9.2% 9.7% 9.5% 9.5% 10.0% 10.4% 10.8% 10.9% 10.8% 10.5% 10.2% 10.2% 10.0% 9.8% 9.6%
[5] Total Housing Inventory 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Vacancy Rate
Vacant Inventory (Year-Round) 10,609 11,035 11,882 11,804 12,012 12,806 13,428 14,177 14,348 14,208 13,851 13,557 13,550 13,347 13,150 12,960
Natural Number of Vacanci es 10,095 10,241 10,395 10,560 10,731 10,891 11,031 11,130 11,189 11,223 11,251 11,281 11,312 11,365 11,426 11,496
Excess Vacant Inventory (Units) 514 794 1,487 1,244 1,281 1,915 2,397 3,047 3,159 2,985 2,600 2,276 2,238 1,982 1,724 1,464
Vacancy Rate 8.9% 9.2% 9.7% 9.5% 9.5% 10.0% 10.4% 10.8% 10.9% 10.8% 10.5% 10.2% 10.2% 10.0% 9.8% 9.6%
Natural Vacancy Rate (1991 - 2001 Avg.) 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
[6] Excess Vacant Inventory (%) 0.4% 0.7% 1.2% 1.0% 1.0% 1.5% 1.8% 2.3% 2.4% 2.3% 2.0% 1.7% 1.7% 1.5% 1.3% 1.1%
Incremental Housing Demand
Total Househol ds (i n 000's) 104,698 105,759 106,505 108,735 110,281 111,096 111,723 111,823 112,485 113,357 113,871 114,698 114,964 115,797 116,710 117,715
[7] Household Formation 1,053 1,061 746 2,230 1,546 815 627 100 662 872 514 827 266 833 913 1,005
Incremental Supply
Housi ng Starts 1,603 1,705 1,848 1,956 2,068 1,801 1,355 906 554 587 609 781 925 1,000 1,100 1,200
Housi ng Compl eti ons 1,571 1,648 1,679 1,842 1,931 1,979 1,503 1,120 794 652 585 650 764 962 1,050 1,150
Demol i ti ons/Esti mate Errors 151 67 131 94 78 (94) 141 42 (99) (249) (254) (303) (400) (332) (334) (336)
[8] Net Completions 1,722 1,715 1,810 1,936 2,009 1,885 1,644 1,162 695 403 331 347 364 630 716 814
Net Absorption Rate
Incremental Demand 1,053 1,061 746 2,230 1,546 815 627 100 662 872 514 827 266 833 913 1,005
Incremental Suppl y (1,722) (1,715) (1,810) (1,936) (2,009) (1,885) (1,644) (1,162) (695) (403) (331) (347) (364) (630) (716) (814)
[9] Absorption Rate - Vacant Inventory (669) (654) (1,064) 294 (463) (1,070) (1,017) (1,062) (33) 469 183 480 (98) 203 197 190
Vacant Inventory Levels
Vacant Uni ts - BOP 9,910 10,609 11,035 11,882 11,804 12,012 12,806 13,428 14,177 14,348 14,208 13,851 13,557 13,550 13,347 13,150
Absorpti on Rate - Vacant Inventory 669 654 1,064 (294) 463 1,070 1,017 1,062 33 (469) (183) (480) 98 (203) (197) (190)
[10] Vacant Units - EOP 10,579 11,263 12,099 11,588 12,267 13,082 13,823 14,490 14,210 13,879 14,025 13,371 13,655 13,347 13,150 12,960
Source: U.S. Census Bureau and RBC Capi tal Markets Esti mates
Housing Model Summary


May 2, 2014 7
Favorable tailwinds support higher volumes
Exhibit 4: Existing home inventory levels
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1.5
1.7
1.9
2.1
2.3
2.5
2.7
Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14
Homes for Sales (millions | LHS) Months' Supply (RHS) Average Months' Supply

Inventory levels for existing homes increased
modestly by 3.1% y/y to 2.0 million homes in
March 2014 (vs. 1.9 million homes in March
2013).
In terms of months supply, inventories rose
by 10.6% y/y to 5.2 months in March 2014 (vs.
4.7 months in March 2013).
Existing home inventory levels continue to
remain below the long-run average of 6.5
months.
Exhibit 5: New home inventory levels
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
135
145
155
165
175
185
195
205
Homes for Sales (millions | LHS) Months' Supply (RHS) Average Months' Supply

Inventory levels for new homes increased by
25.3% y/y to 193,000 homes in March 2014
(vs. 154,000 homes in March 2013).
In terms of months supply, inventories rose
by 42.9% y/y to 6.0 months in March 2014 (vs.
4.2 months in February 2013).
The combination of declining sales and rising
inventory levels has led to an increase in the
months supply of new homes, which is now at
the long-run average of 6.0 months.
Exhibit 6: High degree of affordability
10%
15%
20%
25%
30%
35%
40%
45%
50%
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Monthly P&I as a % of Disposable Income Average

The monthly principal and interest payment
on the median single-family home represents
22% of disposable income per capita. This
compares favorably with the long-run average
of 35% but is above the prior years reading of
19%.
Home ownership is still affordable by historical
standards in spite of the rise in both interest
rates and home prices.
The caveat to this analysis is that affordability
may be overstated due to a shift in mortgage
products toward 30-year FRMs, which have
higher monthly payments
Source: National Association of Realtors, US Census Bureau, and the Federal Reserve


May 2, 2014 8
Modest headwinds limit growth
Exhibit 7: Employment to population ratio remains depressed
63.3%
58.2%
58.9%
4.4%
10.0%
6.7%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
55.0%
56.0%
57.0%
58.0%
59.0%
60.0%
61.0%
62.0%
63.0%
64.0%
Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14
Employment to Population Unemployment Rate

The decline in the unemployment rate from a
peak of 10.0% to 6.7% in March 2014 suggests
that employment trends are improving, which
typically would represent a source of
incremental housing demand.
We believe, however, that the employment to
population ratio is a more robust indicator for
determining incremental housing demand
than the unemployment rate.
Since the end of the recession, the percentage
of the population that is employed has stalled
at nearly 58.5% (vs. a high of 63.4% in 2006).
Exhibit 8: Low-paying jobs are driving employment gains (thousands)
(100)
(50)
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150
200
250
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350
400
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Over the past 12 months, retail, hospitality
(food service), and temporary help have
combined to account for 43% of new jobs. The
bulk of new jobs that created are in low-wage
industries filled with part-time workers.
In contrast, jobs in government, financial
services, manufacturing, and mining that pay
more have combined to account for only 7% of
the total increase in jobs.
Accordingly, the creation of a disproportionate
number of low-paying jobs is impeding
household formation.
Exhibit 9: Persistent unemployment affects first-time homebuyers
25.2%
13.1%
7.7%
6.2%
5.6% 5.8%
21.4%
11.9%
7.0%
5.1% 5.1%
4.6%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
16 to 19 Years 20 to 24 Years 25 to 34 Years 35 to 44 Years 45 to 54 Years 55 Years & Over
2013 2014

Unemployment and underemployment among
younger generations remains persistently
high.
The first-time homebuyer demographic is an
important driver of housing demand, and the
persistently high level of unemployment and
underemployment could impede household
formation.
Homebuilders have acknowledged the
headwinds facing the first-time homebuyer
and continue to shift their product offering
toward move-up buyers.
Source: Federal Reserve; Bureau of Labor Statistics

May 2, 2014 9
Exhibit 10: Household formation has stalled (thousands)
142
563
1,200
0
200
400
600
800
1,000
1,200
1,400
Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13
Household Formation Y/Y 12 Month Moving Average Long-Run Avg.

Household formation appears to have stalled
after experiencing strong growth in 2012 and
1H13.
The current 12-month moving-average stands
at 563,000, which is substantially below the
long-term average of 1.2 MM.
Persistently high unemployment among
younger generations and the absence of
material growth in real disposable income
appear to be limiting household formation.
Exhibit 11: Rising mortgage rates could reduce affordability
3.5%
4.3%
3.0%
3.5%
4.0%
4.5%
5.0%

On an historical basis, affordability remains
high.
Since the beginning of May 2013, the average
30-year mortgage rate has risen by almost 80
basis points to 4.3%.
Despite the recent increase, mortgage rates
remain below the long-run average of nearly
6.5% since 1991.
Source: US Census Bureau, Bankrate


May 2, 2014 10
Home price appreciation moderates
Exhibit 12: Existing home prices moderating
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
120
125
130
135
140
145
150
155
160
165
170
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14
Case Shiller 20 Market Composite Pricing Index (RHS) Y/Y (RHS)

Large gains in 2013 should make for a
challenging comparison in 2014.
According to the Case-Shiller Index, existing
home prices increased by 13.2% y/y to an
index level of 165.5 in January 2014 (vs.
165.63 in December 2013).
Exhibit 13: New home prices moderating
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
$200,000
$210,000
$220,000
$230,000
$240,000
$250,000
$260,000
$270,000
$280,000
$290,000
$300,000
Median New Home Price (LHS) Y/Y (RHS)

New home prices increased by 12.6% y/y to
$290,000 in March 2014 (vs. $257,500 in
March 2013).
We expect that new home prices will continue
to rise but note that month-to-month
variations could occur due to significant shifts
in product mix in addition to real home price
appreciation.
Source: S&P Case Shiller and US Census Bureau


May 2, 2014 11
Commercial Construction
Robert Wetenhall
We expect that commercial construction will rise by 5% to 850 MM square feet in 2014
compared with an average of 1.3B square feet since 1967. Leading indicators (ABI, the
Federal Reserves Senior Loan Officers Survey, and Industrial Vacancy Rates) suggest that
demand is slowly recovering after a protracted slump. The recovery in commercial markets is
likely to be led by private-sector construction activity (office, retail, manufacturing, and
lodging) while public-sector spending (education and healthcare) is expected to remain
muted. Mixed trends across end markets suggest that the recovery will be uneven and more
protracted than what is implied by current consensus expectations (McGraw-Hill
Construction). Our forecast calls for commercial starts of 850 MMSF (+5% | FY14E), 890
MMSF (+5% | FY15E), and 950 MMSF (+7% | FY16E).
Exhibit 14: Commercial construction starts (MMSF)
600
800
1,000
1,200
1,400
1,600
1,800
2,000
'67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15E '17E
Average of five prior
troughs (1,108)
2013 Level
(808)
Average of six prior
peaks (1,578)
Prior Peak in
2007 (1,666)
Average since 1967
(1287)

Source: McGraw-Hill Construction and RBC Capital Markets estimates


May 2, 2014 12
Slight tailwinds suggest nascent recovery
Exhibit 15: Non-residential investment recovery (%)
-80
-60
-40
-20
0
20
40
S
e
p
-
9
0
S
e
p
-
9
1
S
e
p
-
9
2
S
e
p
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9
3
S
e
p
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9
4
S
e
p
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9
5
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e
p
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6
S
e
p
-
9
7
S
e
p
-
9
8
S
e
p
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9
9
S
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p
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0
0
S
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p
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0
1
S
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p
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0
2
S
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p
-
0
3
S
e
p
-
0
4
S
e
p
-
0
5
S
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p
-
0
6
S
e
p
-
0
7
S
e
p
-
0
8
S
e
p
-
0
9
S
e
p
-
1
0
S
e
p
-
1
1
S
e
p
-
1
2
S
e
p
-
1
3
Fed Reserve Sen. Loan Officer Survey (Avg. of Net % Easing + Net % Reporting
Stronger Demand) for Commercial Real Estate Loans
Real Non-Residential (Structures) Investment, y/y%, Advanced 4Qs

The Federal Reserves Senior Loan Officer
Survey indicates that demand for commercial
real estate loans is increasing.
We view this as a leading indicator of
increased commercial construction activity.
Exhibit 16: Architectural Billings Index
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
M
a
r
-
0
4
M
a
r
-
0
5
M
a
r
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6
M
a
r
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M
a
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M
a
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M
a
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a
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M
a
r
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2
M
a
r
-
1
3
M
a
r
-
1
4

The ABI was modestly above the breakeven
level of 50 for eight of the last 12 months,
which indicates increased interest in new
commercial development.
We note that the ABI leads commercial
construction activity by approximately nine to
12 months.
Exhibit 17: Industrial vacancy rates versus construction activity
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100 6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
7
CBRE Vacancy Rate (Inverted) McGraw-Hill Non-Res SF (Right)
r = 0.88 thru 2013

Industrial vacancy rates have declined in
recent quarters.
Declining industrial vacancy rates correlate
closely with increasing construction activity.
Source: Federal Reserve; Bureau of Economic Analysis; American Institute of Architects; CBRE; McGraw-Hill Construction

May 2, 2014 13
End market outlook
Private non-residential spending: We expect that private, nonresidential, construction
spending will increase by 8% to 10% in 2014. Areas that are expected to show the strongest
growth include power (e.g., oil and gas, and pipeline projects), manufacturing (on-shoring),
and lodging (rising hotel occupancy rates). We expect that spending on retail and office
structures will increase modestly (mid-single digits) with more remodeling activity versus
new construction (consumers switching to on-line buying, and employers shrinking office
space).
Public spending: In contrast to our relatively positive forecast for private construction
spending, we believe that federal budget constraints, and state pension and healthcare
spending commitments will limit the amount of public-sector construction spending. Areas of
weakness could include education, healthcare, and highways and streets (due in part to
expiration of MAP-21 and ongoing uncertainty on new transportation bill). Additionally, the
secular trend of people preferring to live in urban areas with existing public facilities rather
than new communities will likely limit demand for new structures.


May 2, 2014 14
Real Estate Sector Impact to GDP
Gerard Cassidy (Analyst) (207) 780-1554; gerard.cassidy@rbccm.com
In the following section of the report, our US Banks Strategist and Large-Cap Banks Analyst
Gerard Cassidy evaluates the ongoing US real estate recovery in the framework of prior real
estate cycles looking back to 1959. He provides a detailed playbook for a return to long-term
averages of real estate spending with respect to GDP and examines a number of scenarios
for the path of the recovery from various duration and rate of growth perspectives. It is a
compelling blueprint for the ultimate outcome of the present real estate cycle.
Real estate components that directly impact GDP
GDP consists of four primary components: 1) personal consumption expenditures (PCE), 2)
gross private domestic investment, 3) net exports of goods and services, and 4) government
consumption expenditures and gross investment. The real estate sector impact lays in the
PCE and gross private domestic investment components. Exhibit 18 provides a breakout of
GDP components and highlights the subcomponents and segments where real estate has a
direct impact. The primary purpose of this section is to demonstrate how investors can
profit from the multi-year real estate recovery; therefore, we will focus our attention
towards the gross private domestic investment components of GDP.
Exhibit 18: Nominal GDP components
$ Billions % GDP
Nominal GDP 13-I 13-II 13-III 13-IV 13-I 13-II 13-III 13-IV
Gross domestic product 16,535.3 16,661.0 16,912.9 17,080.7 100.0% 100.0% 100.0% 100.0%
Personal consumption expenditures 11,379.2 11,427.1 11,537.7 11,640.7 68.8% 68.6% 68.2% 68.2%
Goods 3,851.8 3,848.5 3,912.8 3,933.2 23.3% 23.1% 23.1% 23.0%
Durable goods 1,244.8 1,257.5 1,274.0 1,275.0 7.5% 7.5% 7.5% 7.5%
Motor vehicles and parts 421.3 421.7 427.1 427.2 2.5% 2.5% 2.5% 2.5%
Furnishings and durable household equipment 280.7 284.7 289.4 288.7 1.7% 1.7% 1.7% 1.7%
Recreational goods and vehicles 342.3 346.3 351.7 350.8 2.1% 2.1% 2.1% 2.1%
Other durable goods 200.6 204.7 205.8 208.3 1.2% 1.2% 1.2% 1.2%
Nondurable goods 2,607.0 2,591.0 2,638.8 2,658.2 15.8% 15.6% 15.6% 15.6%
Services 7,527.4 7,578.6 7,624.8 7,707.6 45.5% 45.5% 45.1% 45.1%
Household consumption expenditures (for services) 7,243.6 7,290.2 7,331.7 7,411.3 43.8% 43.8% 43.3% 43.4%
Housing and utilities 2,065.8 2,082.6 2,079.5 2,098.9 12.5% 12.5% 12.3% 12.3%
Health care 1,889.2 1,902.9 1,923.3 1,940.3 11.4% 11.4% 11.4% 11.4%
Transportation services 324.2 322.8 323.8 325.8 2.0% 1.9% 1.9% 1.9%
Recreation services 423.4 422.8 429.7 433.9 2.6% 2.5% 2.5% 2.5%
Food services and accommodations 725.6 732.9 736.3 751.7 4.4% 4.4% 4.4% 4.4%
Financial services and insurance 835.1 842.0 851.1 864.2 5.1% 5.1% 5.0% 5.1%
Other services 980.4 984.4 988.0 996.6 5.9% 5.9% 5.8% 5.8%
Final consumption expenditures of nonprofit institutions serving households (NPISHs) 283.8 288.4 293.2 296.2 1.7% 1.7% 1.7% 1.7%
Gross private domestic investment 2,555.1 2,621.0 2,738.0 2,780.5 15.5% 15.7% 16.2% 16.3%
Fixed investment 2,491.7 2,543.8 2,593.2 2,634.2 15.1% 15.3% 15.3% 15.4%
Nonresidential 2,001.4 2,030.6 2,060.5 2,103.3 12.1% 12.2% 12.2% 12.3%
Structures 429.1 452.6 470.7 475.9 2.6% 2.7% 2.8% 2.8%
Equipment 928.0 934.6 935.8 959.1 5.6% 5.6% 5.5% 5.6%
Intellectual property products 644.3 643.5 654.1 668.2 3.9% 3.9% 3.9% 3.9%
Residential 490.3 513.2 532.6 531.0 3.0% 3.1% 3.1% 3.1%
Change in private inventories 63.4 77.2 144.8 146.3 0.4% 0.5% 0.9% 0.9%
Net exports of goods and services (523.1) (509.0) (500.2) (456.8) -3.2% -3.1% -3.0% -2.7%
Exports 2,214.2 2,238.9 2,265.8 2,320.1 13.4% 13.4% 13.4% 13.6%
Goods 1,531.6 1,548.8 1,572.1 1,614.9 9.3% 9.3% 9.3% 9.5%
Services 682.6 690.2 693.7 705.2 4.1% 4.1% 4.1% 4.1%
Imports 2,737.3 2,747.9 2,766.0 2,776.9 16.6% 16.5% 16.4% 16.3%
Goods 2,281.9 2,288.7 2,304.5 2,309.6 13.8% 13.7% 13.6% 13.5%
Services 455.3 459.3 461.5 467.3 2.8% 2.8% 2.7% 2.7%
Government consumption expenditures and gross investment 3,124.1 3,121.9 3,137.5 3,116.2 18.9% 18.7% 18.6% 18.2%
Federal 1,255.0 1,252.6 1,251.2 1,224.8 7.6% 7.5% 7.4% 7.2%
National defense 775.8 776.3 777.3 753.7 4.7% 4.7% 4.6% 4.4%
Nondefense 479.2 476.3 473.9 471.1 2.9% 2.9% 2.8% 2.8%
State and local 1,869.1 1,869.3 1,886.3 1,891.4 11.3% 11.2% 11.2% 11.1%

Source: Bureau of Economic Analysis; RBC Capital Markets.

May 2, 2014 15
Personal consumption expenditures
The PCE component generally makes up the largest component of GDP, contributing
approximately 70%. The PCE component consists of sub-components of goods and services.
The real estate sector plays a major role as the largest category within the services
subcomponents under the housing and utilities segment. In addition, we believe real estate
plays a role in the furnishings and durable household equipment segment. Both of these
items are highlighted in Exhibit 18.
The housing and utilities segment is essentially rental income plus expenditures on utilities,
and as is often the case, utilities expenses are bundled into rental payments. Specifically, the
Bureau of Economic Analysis (BEA) defines the housing and utilities segment as the
expenditure on rent of tenant-occupied housing, the imputed rent on owner-occupied
housing, the rental value of farm dwellings and other housing services. In the case of
imputed rent on owner-occupied housing, the BEA treats owner-occupied housing as if it
were a rental business where the owner essentially rents to his/herself, and the imputed
rent is calculated using the rental equivalent method, which equates the change in owner-
occupied rent to the change in the market rents charged for similar tenant occupied housing.
Therefore, as the amount of occupied housing increases, (whether it is owner-occupied or
rental), the housing and utilities segment of GDP increases as well.
The furnishings and durable household equipment segment includes expenditures on 1)
furniture and furnishings; 2) household appliances; 3) glassware, tableware, and household
utensils; and 4) tools and equipment for house and garden. Similarly, to the housing and
utilities segment, an increase in the level of occupied housing will have a positive tangential
impact to the furnishing and durable household equipment, in our view.
Gross private domestic investment
As shown in Exhibit 18, gross private domestic investment is broken down into the fixed
investment and change in private inventories subcomponents. The real estate sector plays a
role in the nonresidential structures and residential components.
In our view, the nonresidential structures component will generally be impacted by the
commercial real estate (CRE) sector, and primarily includes domestic spending on
nonresidential structures by private businesses and nonprofit institutions regardless of
whether the asset is owned by US residents. Measurement of nonresidential structures
includes the following:
Cost of new construction:
o Cost of materials installed or erected
o Cost of labor and the cost of construction equipment rental for the period
o Cost of architectural and engineering work
o Miscellaneous overhead and office costs incurred by the projects owners
o Interest and taxes paid during construction
o Contractors profits
Brokers commissions on the sale of structures.
Net purchases of used structures from the government sector: The BEA states that in
general, ownership changes do not reflect current construction activity, but when a
transaction for a used building occurs between the private and government sectors, the
activity is recorded to accurately value the net stock of capital between the public and
private sectors. In sum, these transfers net to zero.
Improvements to existing structures, i.e., re-modeling.
Types of nonresidential structures:

May 2, 2014 16
o Commercial and health care
o Manufacturing and warehouse
o Power and communication
o Mining exploration, shafts, and wells
o Other structures: Consists primarily of religious, educational, vocational, lodging,
railroads, farm, and amusement and recreational structures, net purchases of used
structures, and brokers commissions on the sale of structures.

For the purposes of our CRE analysis, we have stripped out the power and communication
and the mining exploration, shafts, and wells segments to form a modified nonresidential
structures component, which we will refer to as CRE structures hereafter. Not excluding
these items would heavily skew the nonresidential structures component towards items that
many investors would not consider true CRE.
The residential component, which is significantly larger than the CRE Structures sector, is
similar to the nonresidential structures component and consists of private residential
structures and residential producers durable equipment (PDE), which is equipment-owned
by landlords and rented to tenants. Investment in structures consists of new construction of
single-family and multifamily units, improvements to existing units, mobile homes, brokers
commissions on the sale of residential property, and net purchases of used structures from
government agencies.
Exhibit 19 provides the residential and CRE structures contribution to GDP in three periods:
1959-2013, 1959-1989, and 1990-2013. The three periods allow us to view the potential
impact of technology and globalization, which we believe has had the most impact from
1990 and after. We can see from the top graph that the long-term average of residential and
CRE structures contribution to GDP is 6.86%, with a massive falloff from the peak in 4Q05 of
8.41% to the trough in 1Q11 of 3.60%. The bottom two charts split the top chart into pre-
and post-technology/globalization periods. We can see that from 1959 to 1989, the average
contribution to GDP from residential and CRE structures was 7.34%, while the average for
the 1990-2013 period falls to 6.25% with a greater standard deviation.
From these charts, we can see that the latest residential and CRE structures levels are well
below the average and have not even made it to the bottom standard deviation. Assuming
that these two components will follow historical performance, we expect them to pass
through the mean and top off around the top standard deviation. In the next two sub-
sections, we refine our analysis further between residential and CRE and provide estimates
to the remaining upside and duration of recovery.


May 2, 2014 17
Exhibit 19: Residential and CRE structures contribution to GDP
1959-2013
6.86
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
5
9
-
I
6
1
-
I
6
3
-
I
6
5
-
I
6
7
-
I
6
9
-
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7
1
-
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7
3
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7
5
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7
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7
9
-
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8
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-
I
8
3
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3
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5
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7
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b
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n

t
o

G
D
P
(
%
)
Recession Resi & CRE Struct/GDP Average + -

1959-1989
7.34
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
5
9
-
I
6
0
-
I
I
6
1
-
I
I
I
6
2
-
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V
6
4
-
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6
5
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6
6
-
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6
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-
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9
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7
0
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1
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2
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4
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5
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t
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G
D
P
(
%
)
Recession Resi & CRE Struct/GDP Average 59-89 + -

1990-2013
6.25
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9
0
-
I
9
1
-
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9
2
-
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9
3
-
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4
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5
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6
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7
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0
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3
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4
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G
D
P
(
%
)
Recession Resi & CRE Struct/GDP Average 90-13 + -



May 2, 2014 18
The Long View: A Blueprint for a Multi-Year Recovery
Gerard Cassidy
Residential real estate
Residential fixed investments and recessions
The heart of the last financial crisis centered on the excesses of residential real estate.
Exhibit 20 provides the residential fixed investment component contribution to GDP in the
three time periods previously discussed. We can see that the long-term residential fixed
investment contribution to GDP is 4.55%, while the pre-technology/globalization period was
4.75% and post period was 4.30%. From these charts, we can make the following
observations:
The residential fixed investment component is approximately twice as large as the CRE
structures component.
The residential fixed investment component has a fairly good track record at predicting
recessions.

Exhibit 20: Residential fixed investment contribution to GDP
1959-2013
4.55
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
5
9
-
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6
1
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6
3
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o

G
D
P
(
%
)
Recession Resi/GDP Average + -

1959-1989
4.75
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
5
9
-
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I
I
I
7
2
-
I
V
7
4
-
I
7
5
-
I
I
7
6
-
I
I
I
7
7
-
I
V
7
9
-
I
8
0
-
I
I
8
1
-
I
I
I
8
2
-
I
V
8
4
-
I
8
5
-
I
I
8
6
-
I
I
I
8
7
-
I
V
8
9
-
I
C
o
n
t
r
i
b
u
t
i
o
n

t
o

G
D
P
(
%
)
Recession Resi/GDP Average 59-89 + -

1990-2013
4.30
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
9
0
-
I
9
1
-
I
9
2
-
I
9
3
-
I
9
4
-
I
9
5
-
I
9
6
-
I
9
7
-
I
9
8
-
I
9
9
-
I
0
0
-
I
0
1
-
I
0
2
-
I
0
3
-
I
0
4
-
I
0
5
-
I
0
6
-
I
0
7
-
I
0
8
-
I
0
9
-
I
1
0
-
I
1
1
-
I
1
2
-
I
1
3
-
I
C
o
n
t
r
i
b
u
t
i
o
n

t
o

G
D
P
(
%
)

Expanding further on our second observation, the data shows that all of the eight recessions
since 1959 have been preceded by a major downturn in residential fixed investment with the
exception of the 2001 recession, which was primarily a minor blip and was driven by the
dotcom bubble (see Exhibit 21). Likewise, a significant downturn in residential fixed

May 2, 2014 19
investment is usually followed by a recession, with the exception of the 1Q64 to 1Q67
downturn. This downturn was at the height of the Vietnam War, and it could be argued that
the war kept the US out of a recession (see Exhibit 22).
Exhibit 21: Residential fixed investment contribution to GDP
1959-1989
4.75
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
5
9
-
I
6
0
-
I
I
6
1
-
I
I
I
6
2
-
I
V
6
4
-
I
6
5
-
I
I
6
6
-
I
I
I
6
7
-
I
V
6
9
-
I
7
0
-
I
I
7
1
-
I
I
I
7
2
-
I
V
7
4
-
I
7
5
-
I
I
7
6
-
I
I
I
7
7
-
I
V
7
9
-
I
8
0
-
I
I
8
1
-
I
I
I
8
2
-
I
V
8
4
-
I
8
5
-
I
I
8
6
-
I
I
I
8
7
-
I
V
8
9
-
I
C
o
n
t
r
i
b
u
t
i
o
n

t
o

G
D
P
(
%
)

1990-2013
4.30
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
9
0
-
I
9
1
-
I
9
2
-
I
9
3
-
I
9
4
-
I
9
5
-
I
9
6
-
I
9
7
-
I
9
8
-
I
9
9
-
I
0
0
-
I
0
1
-
I
0
2
-
I
0
3
-
I
0
4
-
I
0
5
-
I
0
6
-
I
0
7
-
I
0
8
-
I
0
9
-
I
1
0
-
I
1
1
-
I
1
2
-
I
1
3
-
I
C
o
n
t
r
i
b
u
t
i
o
n

t
o

G
D
P
(
%
)


Exhibit 22: Residential fixed investment versus national defense spending contribution to
GDP
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
5
9
-
I
6
1
-
I
V
6
4
-
I
I
I
6
7
-
I
I
7
0
-
I
7
2
-
I
V
7
5
-
I
I
I
7
8
-
I
I
8
1
-
I
8
3
-
I
V
8
6
-
I
I
I
8
9
-
I
I
9
2
-
I
9
4
-
I
V
9
7
-
I
I
I
0
0
-
I
I
0
3
-
I
0
5
-
I
V
0
8
-
I
I
I
1
1
-
I
I
N
a
t
i
o
n
a
l

D
e
f
e
n
s
e

C
o
n
t
r
i
b
u
t
i
o
n

t
o

G
D
P
R
e
s
i
d
e
n
t
i
a
l

C
o
n
t
r
i
b
u
t
i
o
n

t
o

G
D
P
Residential National defense


Residential fixed investment recovery estimate
Though residential fixed investment has rebounded considerably, current levels are still well
below the long-term mean and still below the -1 standard deviation. We believe residential
fixed investment still has between three and seven years of recovery left. Exhibit 23 details
our analysis. In it, we calculated the trough to peak recovery rate (in terms of percent
contribution to GDP) for six post-recession periods: 4Q11-4Q13, 1Q91-4Q05, 3Q82-4Q86,
1Q75-3Q78, 2Q70-1Q73, and 1Q61-1Q64. With these rates, we created a matrix of the
number of quarters it would take to reach the mean of the three periods previously
discussed (1959-1989, 1990-2013, and 1959-2013), and +1 standard deviation of the long-
term period (1959-2013). The fastest rate occurred in the 2Q70-1Q73 period at 0.18%

May 2, 2014 20
contribution to GDP of residential fixed investment per quarter, while the slowest rate
occurred in the 1Q91-4Q05. We believe the most likely recovery rate range would be the
4Q11-4Q13 period of 0.07% of residential fixed investment contribution to GDP and the
2Q70-1Q73 period of 0.18% of residential fixed investment contribution to GDP. Using data
from the 4Q13 GDP report, adding 0.07%-0.18% of residential fixed investment contribution
equates into $12.6 billion$30.9 billion per quarter. At these rates, it would take between 8
and 19 quarters to reach the long-term mean and 13 to 32 quarters to reach the +1 long-
term standard deviation line. Since recoveries usually exceed the mean, we focus on the +1
standard deviation line. Therefore, we believe the residential fixed investment recovery will
most likely continue to sometime between 1Q17 and 4Q21.
Exhibit 23: Estimate of remaining quarters of residential recovery
Residential Fixed Investments Contribution to GDP (%) 4Q11-4Q13
Average +
1990-2013 1959-2013 1959-1989 1959-2013
4Q13 3.11 4.30 4.55 4.75 5.45
Time Period to Reach Averages and +
# Qtrs & Actual Qtr to Reach Averages and +
Avg Qtr Resi Average +
Trough to Peak Contr Rate (%) 1990-2013 1959-2013 1959-1989 1959-2013
4Q11-4Q13 0.07 # Qtrs to Reach Average and + 16 19 22 32
Quarter 4Q17 3Q18 2Q19 4Q21

4Q11-4Q13 and 2Q70-1Q73 Average Quarterly Rate Scenarios
4.55
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
5
9
-
I
6
1
-
I
I
6
3
-
I
I
I
6
5
-
I
V
6
8
-
I
7
0
-
I
I
7
2
-
I
I
I
7
4
-
I
V
7
7
-
I
7
9
-
I
I
8
1
-
I
I
I
8
3
-
I
V
8
6
-
I
8
8
-
I
I
9
0
-
I
I
I
9
2
-
I
V
9
5
-
I
9
7
-
I
I
9
9
-
I
I
I
0
1
-
I
V
0
4
-
I
0
6
-
I
I
0
8
-
I
I
I
1
0
-
I
V
1
3
-
I
1
5
-
I
I
1
7
-
I
I
I
1
9
-
I
V
C
o
n
t
r
i
b
u
t
i
o
n

t
o

G
D
P

(
%
)
Resi/GDP 4Q11-4Q13 2Q70-1Q73

Source: Bureau of Economic Analysis; RBC Capital Markets estimates.

May 2, 2014 21
Housing starts recovery estimate
A data point investors often look at is the number of housing starts, which is the number of
privately owned housing units where construction has started. Since residential fixed
investments include the construction of single-family and multifamily units, housing starts are
already factored into residential fixed investment, but are accounted for on a dollar basis, not
a number of units constructed basis. Exhibit 24 shows the strong correlation between
residential fixed investment/GDP and housing starts. Based on the linear regression, at the
long-term residential fixed investment/GDP level of 4.55%, housing starts should reach a rate
of 1.47 million units per year. The latest reading of January 2014 was 880,000 units, which
translate to a rolling 12-month average of 930,000 units (see Exhibit 25).
Exhibit 24: Correlation between residential fixed investment/GDP and housing starts
y = 0.0022x + 1.3504
R = 0.8719
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
500 1,000 1,500 2,000 2,500
R
e
s
i
/
G
D
P

(
%
)
Starts 12-Mo Avg (000s)

2.25
3.25
4.25
5.25
6.25
7.25
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
2,300
2,500
J
a
n
-
6
0
O
c
t
-
6
2
J
u
l
-
6
5
A
p
r
-
6
8
J
a
n
-
7
1
O
c
t
-
7
3
J
u
l
-
7
6
A
p
r
-
7
9
J
a
n
-
8
2
O
c
t
-
8
4
J
u
l
-
8
7
A
p
r
-
9
0
J
a
n
-
9
3
O
c
t
-
9
5
J
u
l
-
9
8
A
p
r
-
0
1
J
a
n
-
0
4
O
c
t
-
0
6
J
u
l
-
0
9
A
p
r
-
1
2
R
e
s
i
/
G
D
P

(
%
)
S
t
a
r
t
s

1
2
-
M
o

A
v
g

(
0
0
0
s
)
Recession Starts 12-Mo Avg (000s) Resi/GDP (%)


Exhibit 25: Housing starts
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
2,300
2,500
J
a
n
-
6
0
J
u
n
-
6
2
N
o
v
-
6
4
A
p
r
-
6
7
S
e
p
-
6
9
F
e
b
-
7
2
J
u
l
-
7
4
D
e
c
-
7
6
M
a
y
-
7
9
O
c
t
-
8
1
M
a
r
-
8
4
A
u
g
-
8
6
J
a
n
-
8
9
J
u
n
-
9
1
N
o
v
-
9
3
A
p
r
-
9
6
S
e
p
-
9
8
F
e
b
-
0
1
J
u
l
-
0
3
D
e
c
-
0
5
M
a
y
-
0
8
O
c
t
-
1
0
M
a
r
-
1
3
S
t
a
r
t
s

1
2
-
M
o

A
v
g

(
0
0
0
s
)
Recession Starts 12-Mo Avg (000s) Average + -


May 2, 2014 22
Our housing starts estimate follows the same methodology as our residential fixed
investment analysis and is laid out in Exhibit 26. Here, we calculated the recovery rates for
the recovery periods Jun-11 to Dec-13, Sep-91 to Mar-06, Jun-82 to Sep-86, Jul-75 to Sep-78,
Jun-70 to Dec-72, and Feb-61 to Feb-64. Here, we chose three periods to determine the
range:
Jun-11 to Dec-13: Implies 77 months to reach the +1 standard deviation line (1.86 million
annual units) resulting in a peak in May 2020.
Jul-75 to Sep-78: Implies 37 months to reach the +1 standard deviation line (1.86 million
annual units) resulting in a peak in January 2017.
Jun-70 to Dec-72: Implies 27 months to reach the +1 standard deviation line (1.86 million
annual units) resulting in a peak in March 2016.

Exhibit 26: Estimate of remaining quarters of housing starts recovery
Housing Starts 12-Month Rolling Average (000s) Jun-11-Dec-13
Average +
Jan-90-Dec-20 Jan-60-Dec-20 Jan-60-Dec-89 Jan-60-Dec-20
Jan-14 930 1,332 1,455 1,554 1,860
Time Period to Reach Averages and +
# Months & Actual Month to Reach Averages and +
Avg Monthly Housing Average +
Trough to Peak Starts Rate (000s) Jan-90-Dec-20 Jan-60-Dec-20 Jan-60-Dec-89 Jan-60-Dec-20
Jun-11-Dec-13 12 # Months to Reach Average and + 33 44 52 77
Month/Year Sep-16 Aug-17 Apr-18 May-20
Sep-91-Mar-06 6 # Months to Reach Average and + 64 84 100 149
Month/Year Apr-19 Dec-20 Apr-22 May-26
Jun-82-Sep-86 18 # Months to Reach Average and + 22 29 34 51
Month/Year Oct-15 May-16 Oct-16 Mar-18
Jul-75-Sep-78 25 # Months to Reach Average and + 16 21 25 37
Month/Year Apr-15 Sep-15 Jan-16 Jan-17
Jun-70-Dec-72 35 # Months to Reach Average and + 12 15 18 27
Month/Year Dec-14 Mar-15 Jun-15 Mar-16
Feb-61-Feb-64 12 # Months to Reach Average and + 33 43 51 76
Month/Year Sep-16 Jul-17 Mar-18 Apr-20

Jun-11-Dec-13, Jul-75-Sep-78, and Jun-70-Dec-72 Average Monthly Rate Scenarios
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
2,300
2,500
J
a
n
-
6
0
S
e
p
-
6
2
M
a
y
-
6
5
J
a
n
-
6
8
S
e
p
-
7
0
M
a
y
-
7
3
J
a
n
-
7
6
S
e
p
-
7
8
M
a
y
-
8
1
J
a
n
-
8
4
S
e
p
-
8
6
M
a
y
-
8
9
J
a
n
-
9
2
S
e
p
-
9
4
M
a
y
-
9
7
J
a
n
-
0
0
S
e
p
-
0
2
M
a
y
-
0
5
J
a
n
-
0
8
S
e
p
-
1
0
M
a
y
-
1
3
J
a
n
-
1
6
S
e
p
-
1
8
S
t
a
r
t
s

1
2
-
M
o

A
v
g

(
0
0
0
s
)
Jun-11-Dec-13 Rate Jul-75-Sep-78 Rate Jun-82-Sep-86 Rate



May 2, 2014 23
Home equity and loan-to-value ratios
Homeowners lost an estimated $7.3 trillion in home equity from March 2006 to March 2009
(see left chart of Exhibit 27) as a result of the US housing bust. Since December 2011, home
equity values have increased 60% to $10.0 trillion (right chart of Exhibit 27).
Exhibit 27: Value of housing stock and home equity
Value of US housing stock
Home Equity
Low: Mar-09
6,085
Mar-06
22,617
Dec-13
19,398
-
5,000
10,000
15,000
20,000
25,000
J
a
n
-
8
7
J
u
n
-
8
8
N
o
v
-
8
9
A
p
r
-
9
1
S
e
p
-
9
2
F
e
b
-
9
4
J
u
l
-
9
5
D
e
c
-
9
6
M
a
y
-
9
8
O
c
t
-
9
9
M
a
r
-
0
1
A
u
g
-
0
2
J
a
n
-
0
4
J
u
n
-
0
5
N
o
v
-
0
6
A
p
r
-
0
8
S
e
p
-
0
9
F
e
b
-
1
1
J
u
l
-
1
2
D
e
c
-
1
3
(
$
B
)
U.S. Home Equity Single-Family Mtgs Value of Housing Stock

US home equity
Mar-06
13,400
Mar-09
6,085 Dec-11
6,260
Dec-13
10,026
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
J
a
n
-
8
7
J
u
n
-
8
8
N
o
v
-
8
9
A
p
r
-
9
1
S
e
p
-
9
2
F
e
b
-
9
4
J
u
l
-
9
5
D
e
c
-
9
6
M
a
y
-
9
8
O
c
t
-
9
9
M
a
r
-
0
1
A
u
g
-
0
2
J
a
n
-
0
4
J
u
n
-
0
5
N
o
v
-
0
6
A
p
r
-
0
8
S
e
p
-
0
9
F
e
b
-
1
1
J
u
l
-
1
2
D
e
c
-
1
3
U
.
S
.

H
o
m
e

E
q
u
i
t
y

(
$
B
)
-55%
60%

Source: Federal Reserve Boards Flow of Funds.
Though home equity has substantively recovered, negative equity for some homeowners still
persists. Exhibit 28 shows the percentage of mortgages where the loan-to-value ratios (LTVs)
were near negative (greater than or equal to 95% LTV) and negative (greater than 100% LTV),
along with the aggregate average LTV. Peak negative equity appeared in 1Q10 with 25.9% of
mortgages showing negative equity. The latest reading in 3Q13 shows the percentage of
mortgages with negative equity dropping to 13.0%.
Exhibit 28: Negative equity
56%
58%
60%
62%
64%
66%
68%
70%
72%
74%
0%
5%
10%
15%
20%
25%
30%
35%
A
v
e
r
a
g
e

L
T
V
%

M
o
r
t
g
a
g
e
s
Avg LTV (Right) 95 LTV (Left) 100 < LTV (Left)

Source: CoreLogic

May 2, 2014 24
Exhibit 29 uses the Flow of Funds data to estimate the aggregate LTV for the US and overlays
it with the level of home equity loans. We would like to point out that the data here is
aggregated data from the Federal Reserve Boards Flow of Funds data, and since not all
homes have mortgages, our calculated LTV is most likely lower than actuality for homes with
mortgages. Therefore, what is more important here is to look at the trends, and not
necessarily the calculated LTV level. Here, we calculated the long-term pre-crisis LTV average
from January 1987 to March 2006, which came in at 39.1%. The December 2013 reading
ended at 48%.
Exhibit 29: Mortgage debt/housing stock (LTV) and home equity loans
Dec-13
48%
-
100
200
300
400
500
600
700
30%
35%
40%
45%
50%
55%
60%
65%
J
a
n
-
8
7
J
u
l
-
8
8
J
a
n
-
9
0
J
u
l
-
9
1
J
a
n
-
9
3
J
u
l
-
9
4
J
a
n
-
9
6
J
u
l
-
9
7
J
a
n
-
9
9
J
u
l
-
0
0
J
a
n
-
0
2
J
u
l
-
0
3
J
a
n
-
0
5
J
u
l
-
0
6
J
a
n
-
0
8
J
u
l
-
0
9
J
a
n
-
1
1
J
u
l
-
1
2
H
o
m
e

E
q
u
i
t
y

L
o
a
n
s

(
$
B
)
M
o
r
t
g
a
g
e
/
H
o
u
s
i
n
g

S
t
o
c
k

(
L
T
V
)
Home Equity Loans Mortgage/Housing Stock (LTV)
Average LTV Jan-87 to Mar-06:
39.1%

Source: Federal Reserve Board; RBC Capital Markets.

Home equity loans recovery estimate
Prior to the financial crisis, home equity loans were one of the fastest growing consumer
loan segments, which fueled consumer spending and home sales (in selected situations
home equity loans were part of the down payment at the height of the market in place of
private market insurance, PMI.) Since the financial crisis, home equity loans continue to slide
(see Exhibit 30). This is not too surprising as the equity in many houses declined precipitously
as housing prices plunged. As a result, some homeowners showed negative equity where
they owed more on their homes than the value of their house. Additionally, home equity
lenders, primarily the banking industry, lost billions of dollars with this product and as a
result, the industrys underwriting standards remain conservative relative to the 2005-2008
time period. The conservative underwriting standards have also contributed to the decline in
home equity loan balances.

May 2, 2014 25
Exhibit 30: Home equity loans
-
100
200
300
400
500
600
700
J
a
n
-
8
7
J
u
n
-
8
8
N
o
v
-
8
9
A
p
r
-
9
1
S
e
p
-
9
2
F
e
b
-
9
4
J
u
l
-
9
5
D
e
c
-
9
6
M
a
y
-
9
8
O
c
t
-
9
9
M
a
r
-
0
1
A
u
g
-
0
2
J
a
n
-
0
4
J
u
n
-
0
5
N
o
v
-
0
6
A
p
r
-
0
8
S
e
p
-
0
9
F
e
b
-
1
1
J
u
l
-
1
2
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e
c
-
1
3
H
o
m
e

E
q
u
i
t
y

L
o
a
n
s

(
$
B
)
May-09-Dec-13: -22.5%

Source: Company reports.
In Exhibit 31, we provide an estimate of the number of months it would take to reach the
estimated aggregate LTV ratio of 39.1%. For the denominator of the LTV ratio (value of
housing stock), we calculated the monthly recovery rate similar to our prior analyses based
on the trough to latest peak (refer left chart in Exhibit 31 for value of housing stock). The
trough occurred in December 2011 and the latest peak is the latest reading in December
2013. For the numerator of the LTV ratio (single-family mortgages), we kept this constant.
Based on our analysis, we believe 2014 will show a deceleration in the decline of home
equity balances in 2014, while the rebound would most likely occur in 2015 to mid-2016.
Exhibit 31: Home equity rebound estimate
(in $Billions)
Trough of Housing Stock Dec-11 15,938
Latest Housing Stock Dec-13 19,398
Difference 3,460
# of Months 24
Home Equity Monthly Rate 144
Average LTV Jan-87 to Mar-06 39.1%

Single-Family
Mtgs
Value of
Housing LTV
12/1/13 9,372 19,398 48.3%
1/1/14 9,372 19,542 48.0%
2/1/14 9,372 19,686 47.6%
3/1/14 9,372 19,830 47.3%
4/1/14 9,372 19,974 46.9%
5/1/14 9,372 20,119 46.6%
6/1/14 9,372 20,263 46.3%
7/1/14 9,372 20,407 45.9%
8/1/14 9,372 20,551 45.6%
9/1/14 9,372 20,695 45.3%
10/1/14 9,372 20,839 45.0%
11/1/14 9,372 20,984 44.7%
12/1/14 9,372 21,128 44.4%
1/1/15 9,372 21,272 44.1%
2/1/15 9,372 21,416 43.8%
3/1/15 9,372 21,560 43.5%
4/1/15 9,372 21,704 43.2%
5/1/15 9,372 21,849 42.9%
6/1/15 9,372 21,993 42.6%
7/1/15 9,372 22,137 42.3%
8/1/15 9,372 22,281 42.1%
9/1/15 9,372 22,425 41.8%
10/1/15 9,372 22,569 41.5%
11/1/15 9,372 22,714 41.3%
12/1/15 9,372 22,858 41.0%
1/1/16 9,372 23,002 40.7%
2/1/16 9,372 23,146 40.5%
3/1/16 9,372 23,290 40.2%
4/1/16 9,372 23,434 40.0%
5/1/16 9,372 23,579 39.7%
6/1/16 9,372 23,723 39.5%
7/1/16 9,372 23,867 39.3%
8/1/16 9,372 24,011 39.0%

0
100
200
300
400
500
600
700
30%
35%
40%
45%
50%
55%
60%
65%
J
a
n
-
8
7
S
e
p
-
8
8
M
a
y
-
9
0
J
a
n
-
9
2
S
e
p
-
9
3
M
a
y
-
9
5
J
a
n
-
9
7
S
e
p
-
9
8
M
a
y
-
0
0
J
a
n
-
0
2
S
e
p
-
0
3
M
a
y
-
0
5
J
a
n
-
0
7
S
e
p
-
0
8
M
a
y
-
1
0
J
a
n
-
1
2
S
e
p
-
1
3
M
a
y
-
1
5
H
o
m
e

E
q
u
i
t
y

L
o
a
n
s

(
$
B
)
M
o
r
t
g
a
g
e
/
H
o
u
s
i
n
g

S
t
o
c
k

(
L
T
V
)
Home Equity Loans Mortgage/Housing Stock (LTV) Estimated
Average LTV Jan-87 to Mar-06:
39.1%

Source: Federal Reserve Board; RBC Capital Markets estimates


May 2, 2014 26
Rising mortgage rates not necessarily a negative for the housing market
Some investors and economists believe rising long-term interest rates are a big threat to the
US residential real estate market. If we assume long-term interest rates are not going to
increase parabolically and a stronger economy is the force behind higher long-term interest
rates, we would argue higher long-term rates would be taken in stride by the residential real
estate market. Household formation and employment growth have much larger impacts on
the housing market than interest rates, in our opinion.
Interest rates have reached historical lows for a prolonged period. Exhibit 32 gives the
interest rate level of the 30-year fixed rate conventional mortgage. The low occurred in
November 2012 at 3.31% and has risen to 4.37% as of the latest reading February 2014.
Exhibit 32: 30-year fixed-rate conventional mortgage
11/22/12
3.31
3.0
3.2
3.4
3.6
3.8
4.0
4.2
4.4
4.6
4.8
(
%
)

Source: Federal Reserve Board.
Recently, Pulsenomics, LLC conducted a recent poll where they asked 88 economists for the
minimum rate for a 30-year fixed-rate mortgage that would pose a significant threat to the
housing market recovery (Exhibit 33). Approximately 44% of the respondents indicated an
interest rate level of 6.00%. Given the latest reading of 4.37%, rates would have to rise by
over 160 basis points. The last rate hike occurred between May 2004 and June 2006, which
saw a 425-basis point increase to the Fed Funds target rate. We do not foresee this occurring
anytime soon as the previous rate hike was in response to an over-heated economy.
Likewise, any rate hike would signal to us that the economy is expanding rapidly.

May 2, 2014 27
Exhibit 33: Poll of minimum rate for a 30-year fixed-rate mortgage that would pose a significant threat to the housing market
recovery
Min Rate on the
30-Year FRM
deemed
significant threat
# of
Respondents
% of Respondents
4.50% * 11 12.5%
4.75% 1 1.1%
5.00% 6 6.8%
5.25% 4 4.5%
5.50% 11 12.5%
5.75% 1 1.1%
6.00% 39 44.3%
6.50% 7 8.0%
7.00% 6 6.8%
8.00% 2 2.3%
88 100.0%
* Represents respondents who consider recent rate increases to
be a threat (those who responded "yes" to the primary question,
which references a July level of 4.51%).
11
1
6
4
11
1
39
7
6
0
5
10
15
20
25
30
35
40
45
4.50% * 4.75% 5.00% 5.25% 5.50% 5.75% 6.00% 6.50% 7.00%
N
u
m
b
e
r

o
f

R
e
s
p
o
n
d
e
n
t
s
(
n

=

_
_
)
Minimum Rate for a 30-year FRM That Would Pose a Significiant Threat
to the Housing Market Recovery
Mean: 5.78 %
Median: 6.00 %

Source: Pulsenomics LLC
More importantly, we argue that a healthy job market will have a greater impact to the
residential real estate sector than the absolute level of interest rates. We believe job security
is the number one factor as to whether a potential homebuyer will actually make a purchase,
whereas the interest rate level will have a greater impact on what the potential homebuyer
will purchase. Exhibit 34 overlays the 12-month rolling average housing starts with the 12-
month rolling average 10-year treasury yield. Here we can see that though there may be
some correlation, the correlation appears minimal at best. It is also important to remember
that strong housing starts have occurred with the 10-year treasury rate well above 6%. In
fact, for almost the entire period between 1968 and 1997, the 10-year treasury was north of
6%, which included periods with strong housing starts. The rate of change in interest rates,
however, may have short-term impact on housing as potential homeowners could alter the
decision on when to purchase a house. If 15- and 30-year fixed rate mortgages rose to
unaffordable levels, we would expect the prospective homeowner to roll down the yield
curve using shorter duration mortgages similar to what occurred in the past high interest
rate periods.
Exhibit 34: Housing starts versus 10-year treasury 12-month average
-
2
4
6
8
10
12
14
16
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
2,300
2,500
J
a
n
-
6
0
O
c
t
-
6
2
J
u
l
-
6
5
A
p
r
-
6
8
J
a
n
-
7
1
O
c
t
-
7
3
J
u
l
-
7
6
A
p
r
-
7
9
J
a
n
-
8
2
O
c
t
-
8
4
J
u
l
-
8
7
A
p
r
-
9
0
J
a
n
-
9
3
O
c
t
-
9
5
J
u
l
-
9
8
A
p
r
-
0
1
J
a
n
-
0
4
O
c
t
-
0
6
J
u
l
-
0
9
A
p
r
-
1
2
I
n
t
e
r
e
s
t

R
a
t
e
s

(
%
)
S
t
a
r
t
s

1
2
-
M
o

A
v
g

(
0
0
0
s
)
Starts 12-Mo Avg (000s) 10-Yr Treas 12-Mo Avg (%) 6% Level

Source: Federal Reserve Board; Bureau of Economic Analysis; RBC Capital Markets

May 2, 2014 28
Therefore, we focus our attention on job security. We base our assessment of job security on
two primary datasets: US non-farm payrolls (Exhibit 35) and the US unemployment rate
(Exhibit 36). The March 2014 payrolls report showed a gain of 192,000 jobs, near market
expectations of 200,000, while the unemployment rate held steady at 6.7% in March.
Overall, this was a fairly good reading with the total nonfarm payroll number at 137.9
million, nearing the peak witnessed in January 2008 of 138.4 million.
Exhibit 35: US non-farm payrolls
Mar-14
137,928
50,000
75,000
100,000
125,000
150,000
1
9
6
0
1
9
6
2
1
9
6
4
1
9
6
6
1
9
6
8
1
9
7
0
1
9
7
2
1
9
7
4
1
9
7
6
1
9
7
8
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
2
0
1
4
A
l
l

E
m
p
l
o
y
e
e
s
,

(
T
h
o
u
s
a
n
d
s
)
Source: U.S. Bureau of Labor Statistics
Percentages represent percentage change from peak to trough; shaded areas indicate U.S. recession
Data as of March 2014
Prior 3 Months
Dec-13 = 137,395
Jan-14 = 137,524
Feb-14 = 137,699
Avg % = 0.11%
-1.46%
-2.69%
-3.04%
-1.48%
-1.96%
-6.29%

Percentages represent percentage change from peak to trough; shaded areas indicate US recession Data as of March 2014"
Source: US Bureau of Labor Statistics

Exhibit 36: Unemployment index (%)
6.1%
Sep 1969, 3.4%
May 1975, 9.0%
Nov 1982, 10.8%
Jun 1992, 7.8%
Apr 2000, 3.9%
Jun 2003, 6.3%
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
1
9
6
0
1
9
6
1
1
9
6
2
1
9
6
3
1
9
6
4
1
9
6
5
1
9
6
6
1
9
6
7
1
9
6
8
1
9
6
9
1
9
7
0
1
9
7
1
1
9
7
2
1
9
7
3
1
9
7
4
1
9
7
5
1
9
7
6
1
9
7
7
1
9
7
8
1
9
7
9
1
9
8
0
1
9
8
1
1
9
8
2
1
9
8
3
1
9
8
4
1
9
8
5
1
9
8
6
1
9
8
7
1
9
8
8
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
C
Y
-
1
4
C
Y
-
1
5
(
%
)
Mar
2014,
6.7%
Source: Bureau of Labor Statistics & RBC Capital Markets; shaded areas indicate U.S. recession
Data as of March 2014
6.5%

Shaded areas indicate US recession. Data as of March 2014.
Source: Bureau of Labor Statistics & RBC Capital Markets
As we mentioned earlier, we believe a healthy job market will have a greater impact on the
residential real estate sector than the absolute level of interest rates. Referring back to
Exhibit 34, we can see that it is difficult to decipher any clear trends. In Exhibit 37, using the
same housing starts data, we overlay the US non-farm payrolls data and the US
unemployment rate data (inverted). Though not perfect, we can see here that there appears

May 2, 2014 29
to be a stronger correlation between the performance of the residential real estate sector
and the job market.
Exhibit 37: Housing starts vs. US non-farm payrolls and inverse of US unemployment index
Housing starts vs. US non-farm payrolls
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
2,300
2,500
J
a
n
-
6
0
D
e
c
-
6
2
N
o
v
-
6
5
O
c
t
-
6
8
S
e
p
-
7
1
A
u
g
-
7
4
J
u
l
-
7
7
J
u
n
-
8
0
M
a
y
-
8
3
A
p
r
-
8
6
M
a
r
-
8
9
F
e
b
-
9
2
J
a
n
-
9
5
D
e
c
-
9
7
N
o
v
-
0
0
O
c
t
-
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e
p
-
0
6
A
u
g
-
0
9
J
u
l
-
1
2
P
a
y
r
o
l
l
s

A
n
n
u
a
l
i
z
e
d

%

C
h
g

1
2
-
M
o

A
v
g
S
t
a
r
t
s

1
2
-
M
o

A
v
g

(
0
0
0
s
)
Starts 12-Mo Avg (000s) Payrolls Ann'l % Chg 12-Mo Avg

Housing starts vs. inverse of US unemployment index
9
12
15
18
21
24
27
30
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
2,300
2,500
J
a
n
-
6
0
O
c
t
-
6
2
J
u
l
-
6
5
A
p
r
-
6
8
J
a
n
-
7
1
O
c
t
-
7
3
J
u
l
-
7
6
A
p
r
-
7
9
J
a
n
-
8
2
O
c
t
-
8
4
J
u
l
-
8
7
A
p
r
-
9
0
J
a
n
-
9
3
O
c
t
-
9
5
J
u
l
-
9
8
A
p
r
-
0
1
J
a
n
-
0
4
O
c
t
-
0
6
J
u
l
-
0
9
A
p
r
-
1
2
I
n
v
e
r
s
e

U
n
e
m
p
l
o
y
m
e
n
t

R
a
t
e
S
t
a
r
t
s

1
2
-
M
o

A
v
g

(
0
0
0
s
)
Starts 12-Mo Avg (000s) Inverse Unemployment Rate

Source: Bureau of Labor Statistics; Bureau of Economic Analysis; RBC Capital Markets.
Other major indicators that we track to assess the health of the job market are the US
unemployment insurance initial weekly claims in Exhibit 38 and the jobs openings and labor
turnover summary (JOLTS) in Exhibit 39. As one can see, the unemployment insurance claims
are down to normalized levels and we would expect this trend to continue in the near future.
For the JOLTS report, there are a few takeaways. First, the level of layoffs and discharges
continue to trend down. Second, the number of quits continues to expand. Generally, most
people do not quit their job unless they have a better job, so this is a positive sign. Lastly, the
number of hires and openings continue to increase. Overall, the trends in the job market look
healthy, and this should bode well for residential real estate, in our view.

May 2, 2014 30
Exhibit 38: US unemployment insurance initial weekly claims (4-week moving average)
Dec-07
341,500
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
550,000
600,000
650,000
700,000
1
9
6
7
1
9
7
0
1
9
7
3
1
9
7
6
1
9
7
9
1
9
8
2
1
9
8
5
1
9
8
8
1
9
9
1
1
9
9
4
1
9
9
7
2
0
0
0
2
0
0
3
2
0
0
6
2
0
1
0
2
0
1
3
(
S
e
a
s
o
n
a
l
l
y

A
d
j
u
s
t
e
d

C
l
a
i
m
s
)
Source: U.S. Department of Labor; shaded areas indicate U.S. recession.
Data as of April 26, 2014
Oct-82
674,250
Apr-09
659,500
Apr-14
320,000
Oct-82 to Feb-84:
16 Months
49.7% Decline
Apr-09 to Apr-14:
60 Months
51.5% Decline
Prior 3-Week Averages
3 week ago = 316,750
2 week ago = 312,000
1 week ago = 317,000

Source: US Department of Labor; shaded areas indicate US recession.
Data as of April 26, 2014.

Exhibit 39: Jobs openings and labor turnover summary six-month rolling average
Quits, Mar-07, 2,985
Openings, Apr-07, 4,534
-
1,000
2,000
3,000
4,000
5,000
6,000
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
H
i
r
e
s
,

O
p
e
n
i
n
g
s
,

S
e
p
a
r
a
t
i
o
n
s

p
e
r

M
o
n
t
h

(
0
0
0
s
)
Layoffs & Discharges Quits Other Separations Recessions Hires Openings
Source: U.S. Bureau of Labor Statistics
Data as of Feb-14

Source: US Bureau of Labor Statistics
Data as of February 2014.

Could student loans be a potential threat down the road?
Could a potential threat to the continued recovery in residential real estate sector and
possibly the overall economy be the rising levels of student loans? Student loans reached
$1.08 trillion in 4Q13 or 9.0% of total loans outstanding, and have grown at a compounded
annual rate of 15% since 1Q03. The Federal Reserve Bank of New York has cited this as a
potential problem with the concern that there may not be enough adequate employment to
service the mounting debt. Our primary concern is the impact the student loan debt levels
could have on the entry level housing market. According to a Federal Reserve Bank of New
York study in the fourth quarter of 2012, the average student loan borrower under age 30

May 2, 2014 31
owed nearly $21,000. We believe it is too early to conclude that the elevated level of student
debt will have a meaningful impact on the housing market but it bears monitoring closely.
Exhibit 40: Student debt outstanding
13:Q4
1.080
0.0
0.2
0.4
0.6
0.8
1.0
1.2
0
3
:
Q
1
0
3
:
Q
3
0
4
:
Q
1
0
4
:
Q
3
0
5
:
Q
1
0
5
:
Q
3
0
6
:
Q
1
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:
Q
3
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7
:
Q
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0
7
:
Q
3
0
8
:
Q
1
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:
Q
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9
:
Q
1
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9
:
Q
3
1
0
:
Q
1
1
0
:
Q
3
1
1
:
Q
1
1
1
:
Q
3
1
2
:
Q
1
1
2
:
Q
3
1
3
:
Q
1
1
3
:
Q
3
S
t
u
d
e
n
t

D
e
b
t

(
$

T
r
i
l
l
i
o
n
s
)
CAGR: 15%

Source: Federal Reserve Bank of New York.

Commercial Real Estate (CRE)
CRE structures recovery estimate
As we mentioned previously, we modified the nonresidential structures component of GDP
to strip out what we consider to be non-CRE items like power and communication, and the
mining exploration, shafts, and wells segments to form a modified nonresidential structures
component called CRE structures. Exhibit 41 gives the historical contribution of CRE
structures to GDP consistent with the three time periods we previously discussed. The long-
term average of 1959-2013 shown in the top chart was 2.31%, approximately half of the
residential fixed investments long-term GDP contribution average of 4.55%. The bottom left
chart gives the data under the pre-technology/globalization (1959-1989) period and the
bottom right chart gives the post period (1990-2013). We can see that there appears to be a
fundamental shift between these two periods where the contribution to GDP was much
stronger in the pre period (average GDP contribution of 2.59%) versus the post period
(average GDP contribution of 1.95%). It is unclear as to why this is the case, but we believe
technology and globalization may have played a fundamental role.

May 2, 2014 32
Exhibit 41: CRE structures contribution to GDP
1959-2013
2.31
1.0
1.5
2.0
2.5
3.0
3.5
5
9
-
I
6
1
-
I
6
3
-
I
6
5
-
I
6
7
-
I
6
9
-
I
7
1
-
I
7
3
-
I
7
5
-
I
7
7
-
I
7
9
-
I
8
1
-
I
8
3
-
I
8
5
-
I
8
7
-
I
8
9
-
I
9
1
-
I
9
3
-
I
9
5
-
I
9
7
-
I
9
9
-
I
0
1
-
I
0
3
-
I
0
5
-
I
0
7
-
I
0
9
-
I
1
1
-
I
1
3
-
I
C
o
n
t
r
i
b
u
t
i
o
n

t
o

G
D
P
(
%
)
Recession CRE Struct/GDP Average + -

1959-1989
2.59
1.0
1.5
2.0
2.5
3.0
3.5
5
9
-
I
6
0
-
I
I
6
1
-
I
I
I
6
2
-
I
V
6
4
-
I
6
5
-
I
I
6
6
-
I
I
I
6
7
-
I
V
6
9
-
I
7
0
-
I
I
7
1
-
I
I
I
7
2
-
I
V
7
4
-
I
7
5
-
I
I
7
6
-
I
I
I
7
7
-
I
V
7
9
-
I
8
0
-
I
I
8
1
-
I
I
I
8
2
-
I
V
8
4
-
I
8
5
-
I
I
8
6
-
I
I
I
8
7
-
I
V
8
9
-
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C
o
n
t
r
i
b
u
t
i
o
n

t
o

G
D
P
(
%
)
Recession CRE Struct/GDP Average 59-89 + -

1990-2013
1.95
1.0
1.5
2.0
2.5
3.0
3.5
9
0
-
I
9
1
-
I
9
2
-
I
9
3
-
I
9
4
-
I
9
5
-
I
9
6
-
I
9
7
-
I
9
8
-
I
9
9
-
I
0
0
-
I
0
1
-
I
0
2
-
I
0
3
-
I
0
4
-
I
0
5
-
I
0
6
-
I
0
7
-
I
0
8
-
I
0
9
-
I
1
0
-
I
1
1
-
I
1
2
-
I
1
3
-
I
C
o
n
t
r
i
b
u
t
i
o
n

t
o

G
D
P
(
%
)
Recession CRE Struct/GDP Average 90-13 + -

Consistent with our previous analyses, Exhibit 42 provides our CRE structures estimate,
which estimates a recovery rate based on troughs to peak. Since we believe that there
indeed may be a structural change in CRE prior to 1990, our estimate is based on the 1990-
2013 period, where we chose three recovery periods: 1Q94-4Q98, 1Q04-2Q08, and 3Q05-
2Q08. The last two recovery periods are actually the same but one is based on an actual
trough at 1Q04 and the other is based on a non-actual trough at 3Q05, as there was
considerable sideways movement between the two periods.
We believe the most likely recovery rate range would be the 1Q94-4Q98 period of 0.03% of
CRE structures fixed investment contribution to GDP per quarter and 3Q05-2Q08 period of
0.05% of CRE structures fixed investment contribution to GDP per quarter. Using data from
the 4Q13 GDP report, adding 0.03%-0.05% of CRE structures fixed investment contribution
equates into $5.7 billion$9.2 billion per quarter. At these rates, it would take between 10
and 16 quarters to reach the long-term mean and 17 to 28 quarters to reach the +1 long-
term standard deviation line. Based on our analysis, we estimate the CRE structures
recovery to last to some time between 1Q18 and 4Q20.

May 2, 2014 33
Exhibit 42: Estimate of remaining quarters of nonresidential recovery
CRE Structures Contribution to GDP (%)
Average +
1990-2013 1990-2013
4Q13 1.40 1.95 2.35
Time Period to Reach Average and +
# Qtrs & Actual Qtr to
Reach Average and +
Avg Qtr CRE Struct Average +
Trough to Peak Contr Rate (%) 1990-2013 1990-2013
1Q94-4Q98 0.03 # Qtrs to Reach Average and + 16 28
Quarter 4Q17 4Q20
Quarter 2Q17 4Q19
Quarter 2Q16 1Q18

1Q98-4Q98, 1Q04-2Q08, and 3Q05-2Q08 Average Quarterly Rate Scenarios
1.95
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
9
0
-
I
9
1
-
I
I
9
2
-
I
I
I
9
3
-
I
V
9
5
-
I
9
6
-
I
I
9
7
-
I
I
I
9
8
-
I
V
0
0
-
I
0
1
-
I
I
0
2
-
I
I
I
0
3
-
I
V
0
5
-
I
0
6
-
I
I
0
7
-
I
I
I
0
8
-
I
V
1
0
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I
1
1
-
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I
1
2
-
I
I
I
1
3
-
I
V
1
5
-
I
1
6
-
I
I
1
7
-
I
I
I
1
8
-
I
V
2
0
-
I
C
o
n
t
r
i
b
u
t
i
o
n

t
o

G
D
P
(
%
)
CRE Struct/GDP 1Q94-4Q98 1Q04-2Q08 3Q05-2Q08

Exhibit 43 is an estimate of nonresidential construction activity provided by McGraw-Hill and
is based on the level of nonresidential construction square footage starts. The analysis shows
that the average nonresidential construction square footage starts since 1967 was 1.29
billion square feet. McGraw Hill shows 2013 at 808 million square feet and estimates starts
to reach the 1.29 billion square feet mark by 2018.

May 2, 2014 34
Exhibit 43: Nonresidential construction activity
600
800
1,000
1,200
1,400
1,600
1,800
2,000
'67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17
M
i
l
l
i
o
n
s

o
f

S
q
u
a
r
e

F
e
e
t
Average of five prior
troughs (1,108)
2013 Level
(808)
Average of six prior
peaks (1,578)
Average since 1967
(1287)
Prior Peak in
2007 (1,666)

Source: McGraw-Hill
The expected fundamental trends for the CRE sector appear positive for almost all property
types in the future. Generally speaking, stronger employment leads to a healthier
commercial real estate market. As individuals are hired into new jobs, they will need to
occupy space. We recognize, however, in the post technology/globalization period more
individuals have the option of not working in the traditional work place setting of the 1980s.
Additionally, we also believe the trend of less square footage per employee will remain in
place for an extended period of time. Exhibit 44 provides historical and estimated vacancy
rates, levels of completions and absorptions by property type:
The top left chart compares the vacancy rates across the five property types. All vacancy
rates are expected to decline in the future with the exception of apartments.
The top right chart gives the vacancy rate, completions and absorptions for apartment
properties. As a reminder, when absorptions are greater than completions, the vacancy
rate declines and vice versa. The vacancy rate remains relatively flat in 2014 but then
increases thereafter driven by large declines in absorptions partially offset by smaller
declines in completions up until 2018.
The middle left chart gives the vacancy rate, completions and absorptions for office
properties. Since 2010, the vacancy rate has declined through 2013 and is expected to
decline through 2018 driven by strong expected absorptions, particularly in 2017.
The middle right chart gives the vacancy rate, completions and absorptions for retail
properties. Vacancy rates for retail properties have remained elevated at around 9.5% or
higher since spiking up in 2008 and 2009. The large spike was due to a large drop-off in
absorptions with 2009 recording negative absorptions. After peaking in 2010 and 2011,
vacancy rates have declined through 2013 and are expected to continue this trend
through 2018 driven by strong absorption levels.
The bottom left chart gives the vacancy rate, completions and absorptions for
warehouse properties going back to the earliest available data of 2010. Since 2010,
warehouse vacancy rates have also seen consistent declines with strong absorption
levels in 2011 and 2012. Absorption levels are expected to remain fairly consistent from
2014 through 2017 before modestly declining in 2018, but still above completion levels.
The bottom right chart gives the vacancy rate, completions and absorptions for
industrial properties. Vacancy rates peaked in 2010 at 11.7% driven by negative

May 2, 2014 35
absorption levels from 2008 to 2010. Since then, vacancy rates have dropped
dramatically and are expected to continue this trend through 2018 due to strong
absorption levels.

Exhibit 44: CRE vacancy rate, completions, and absorptions by property type
Vacancy rates
2
4
6
8
10
12
14
16
18
1
9
9
9
A
2
0
0
0
A
2
0
0
1
A
2
0
0
2
A
2
0
0
3
A
2
0
0
4
A
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
A
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
V
a
c
a
n
c
y

R
a
t
e

(
%
)
Apt Office Retail Warehouse Industrial

Apartments: completions, absorptions, vacancy rates
3
4
5
6
7
8
9
(50)
0
50
100
150
200
250
1
9
9
9
A
2
0
0
0
A
2
0
0
1
A
2
0
0
2
A
2
0
0
3
A
2
0
0
4
A
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
A
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
V
a
c
a
n
c
y

R
a
t
e

(
%
)
C
o
m
p
l
e
t
i
o
n
s

&

A
b
s
o
r
p
t
i
o
n

(
0
0
0
s

S
F
/
U
n
i
t
)
Completions Net Absorption Vacancy Rate

Office: completions, absorptions, vacancy rates
7
9
11
13
15
17
19
(150)
(100)
(50)
0
50
100
150
1
9
9
9
A
2
0
0
0
A
2
0
0
1
A
2
0
0
2
A
2
0
0
3
A
2
0
0
4
A
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
A
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
V
a
c
a
n
c
y

R
a
t
e

(
%
)
C
o
m
p
l
e
t
i
o
n
s

&

A
b
s
o
r
p
t
i
o
n

(
M
s

S
F
/
U
n
i
t
)

Retail: completions, absorptions, vacancy rates
6.0
7.0
8.0
9.0
10.0
11.0
12.0
(30)
(20)
(10)
0
10
20
30
40
50
1
9
9
9
A
2
0
0
0
A
2
0
0
1
A
2
0
0
2
A
2
0
0
3
A
2
0
0
4
A
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
A
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
V
a
c
a
n
c
y

R
a
t
e

(
%
)
C
o
m
p
l
e
t
i
o
n
s

&

A
b
s
o
r
p
t
i
o
n

(
M
s

S
F
/
U
n
i
t
)

Warehouse: completions, absorptions, vacancy rates
7
8
9
10
11
12
13
14
15
(60)
(40)
(20)
0
20
40
60
80
100
2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E
V
a
c
a
n
c
y

R
a
t
e

(
%
)
C
o
m
p
l
e
t
i
o
n
s

&

A
b
s
o
r
p
t
i
o
n

(
M
s

S
F
/
U
n
i
t
)

Industrial: completions, absorptions, vacancy rates
6
7
8
9
10
11
12
(75)
(50)
(25)
0
25
50
75
100
125
150
1
9
9
9
A
2
0
0
0
A
2
0
0
1
A
2
0
0
2
A
2
0
0
3
A
2
0
0
4
A
2
0
0
5
A
2
0
0
6
A
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
A
2
0
1
4
E
2
0
1
5
E
2
0
1
6
E
2
0
1
7
E
2
0
1
8
E
V
a
c
a
n
c
y

R
a
t
e

(
%
)
C
o
m
p
l
e
t
i
o
n
s

&

A
b
s
o
r
p
t
i
o
n

(
M
s

S
F
/
U
n
i
t
)

Source: REIS.

May 2, 2014 36
Exhibit 45 provides a regional breakout of expected vacancy rates from 2013 through 2018
by property type. The table is color-coded for comparison purposes between regions for
each year (green denotes a low vacancy rate and red denotes a high vacancy rate):
Apartments: The northeast region shows the lowest vacancy levels while the southwest
shows the highest. The west region starts out in 2013 at a level comparable to the
northeast, but climbs higher through 2018 surpassing Midwest levels.
Office: The northeast again is expected to exhibit the lowest vacancy rates through
2018. The highest vacancy rate comes from the Midwest, though the trends are very
positive with the 2018 vacancy rate expected to fall to 15.8% from 19.6% in 2013.
Retail: The northeast and west region start out in 2013 with the lowest vacancy rates
compared to the other regions; however, the west region is expected to show the better
improvement between the two.
Warehouse: The west region is expected to show the lowest vacancy rates through 2018
declining to 8.5% from 10.3% in 2013. The south Atlantic and Midwest parallel each
other with the highest expected vacancy rates, though the trends are positive.
Industrial: The west region shows the lowest expected vacancy rates falling to 5.3% by
2018. The northeast is expected to exhibit the highest vacancy rates with south Atlantic
not too far behind and reach parity by 2018 at 8.8%, though all regions are expected to
show positive trends.

Exhibit 45: Regional vacancy rates by property type
Apartments 2013A 2014E 2015E 2016E 2017E 2018E Chart
Northeast 3.3 3.1 3.3 3.4 3.5 3.8
South Atlantic 4.8 4.7 5.0 5.2 5.4 5.8
Midwest 3.9 3.8 3.8 3.9 4.1 4.3
Southwest 5.4 5.6 5.9 6.1 6.3 6.5
West 3.5 3.5 3.6 3.8 4.1 4.4
Office 2013A 2014E 2015E 2016E 2017E 2018E Chart
Northeast 14.2 13.8 13.6 13.3 12.9 12.7
South Atlantic 17.0 16.6 16.1 15.5 14.7 14.3
Midwest 19.6 19.2 18.7 17.9 16.8 15.8
Southwest 17.8 17.6 17.3 16.7 15.9 15.3
West 17.2 16.8 16.4 15.8 15.0 14.4
Retail 2013A 2014E 2015E 2016E 2017E 2018E Chart
Northeast 8.7 8.5 8.2 7.9 7.7 7.4
South Atlantic 10.6 10.3 9.8 9.2 8.7 8.2
Midwest 12.4 12.2 11.9 11.6 11.1 10.5
Southwest 12.0 11.7 11.3 11.0 10.5 9.9
West 8.8 8.5 8.1 7.7 7.3 6.8
Warehouse 2013A 2014E 2015E 2016E 2017E 2018E Chart
Northeast 10.8 10.4 9.9 9.5 9.1 8.8
South Atlantic 12.7 12.2 11.8 11.3 10.8 10.6
Midwest 12.7 12.2 11.8 11.3 10.8 10.6
Southwest 10.8 10.5 10.1 9.6 9.2 8.9
West 10.3 9.9 9.6 9.1 8.7 8.5
Industrial 2013A 2014E 2015E 2016E 2017E 2018E Chart
Northeast 11.7 11.0 10.5 9.8 9.1 8.8
South Atlantic 11.3 10.8 10.2 9.6 9.1 8.8
Midwest 9.4 8.8 8.4 7.8 7.3 7.0
Southwest 10.3 10.0 9.4 8.8 8.2 7.9
West 7.5 7.2 6.5 6.0 5.5 5.3

Source: REIS.
The improvement in vacancy rates is at least partially attributable to an improving labor
market, in our opinion. Exhibit 46 compares the office vacancy rate with non-farm payrolls
(left chart) and the unemployment rate. Though not perfect, we can see that generally, the
trends are fairly consistent, especially with the US unemployment rate.

May 2, 2014 37
Exhibit 46: Office vacancy rate vs. US non-farm payrolls and US unemployment rate
Office vacancy rate vs. Inverse US non-farm payrolls
7.0
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
-
2
4
6
8
10
12
14
16
18
20
1
/
A
v
g

P
a
y
r
o
l
l
s

(
M
)
V
a
c
a
n
c
y

R
a
t
e

(
%
)
Office Vacancy Rate Inverse Avg Payrolls

Office vacancy rate vs. US unemployment rate
3
4
5
6
7
8
9
10
11
12
-
2
4
6
8
10
12
14
16
18
20
A
v
g
.

U
n
e
m
p
l
o
y
m
e
n
t

R
a
t
e

(
%
)
V
a
c
a
n
c
y

R
a
t
e

(
%
)
Office Vacancy Rate Avg Unemployment Rate (%)

Source: REIS; Bureau of Labor Statistics; Bureau of Economic Analysis; RBC Capital Markets.
Lastly, we believe that after years of declining government spending, we expect this trend to
subside and eventually reverse. Our expected increase in government spending will lead to
an increase in spending for public structures and the like. As a result, we believe the increase
in government spending will also contribute to the CRE recovery.

May 2, 2014 38
Building Products & Home Builders
Robert Wetenhall

Portfolio strategy
1) Best risk/reward Building product stocks leveraged to new residential
construction, and repair and remodel spending
Our favorite stocks are positioned to benefit from accelerating trends in new residential
construction, and residential repair and remodel spending (FBHS, MAS, and MHK), which
should support strong volume growth and robust incremental margin performance driven by
favorable sales leverage and a richer product mix. On the small-cap side, we would
overweight NCFT and PGTI.
2) Risk/reward for home builders is favorable
We also have a constructive view on the spring selling season, which should benefit
homebuilders. Our favorite stocks (LEN, PHM, KBH, and BRP) have a strong presence in
growing markets located in California, Florida, and Texas. We believe that demand trends
and favorable pricing dynamics in these markets will enable these builders to deliver
sustained earnings growth.
3) Risk/reward for commercial construction is less attractive
Building product companies that are leveraged primarily to commercial construction should
begin to see meaningful volume growth starting in 2H14. We remain cautious on these
stocks, however, given limited visibility into fundamentals and strong YTD performance. Our
favorite stocks for investors who are comfortable owning the cyclical risk associated with
commercial construction activity include CBPX, NCS, and VMC.


May 2, 2014 39
Building products: End-market demand trends
Protracted recovery in new residential construction: We forecast housing starts of 1.0 MM
(+8% Y/Y) in 2014 and expect that starts will rise to 1.1 MM (2015) and 1.2 MM (2016).
Companies with substantial leverage to new residential construction activity include CBPX
(35%), NCFT (33% of sales), PGTI (28%), MAS (27%), DOOR (25%), FBHS (25%), and USG (25%).
Residential repair and remodel spending levels surge: We expect that R&R spending levels
will increase by 7% and will be fueled by rising home prices and increased resale activity. This
years bounce in home prices also supports the potential realization of a richer product mix
as consumers take on larger remodeling projects. Key beneficiaries of increased R&R
spending include MAS (73% of sales), PGTI (72%), NCFT (67%), MHK (60%), and FBHS (57%).
Commercial construction gradually accelerates: Increased capital expenditures suggest that
commercial construction activity could meaningfully accelerate in 2H14. Activity levels in the
southern US appear to be leading the comeback and are driven by private-sector investment
in retail, office, and industrial projects. In contrast, public-sector spending on healthcare and
education is likely to remain sluggish. AWI (65% of sales), USG (50%), BECN (45%), CBPX
(45%), VMC (28%), MHK (25%), OC (22%), and DOOR (15%) should benefit if commercial
construction activity improves as expected.
Mixed international demand trends: Regional trends in Europe remain choppy with sluggish
demand in continental Europe offsetting modest growth in the UK. We expect that mixed
demand trends will continue with strength in the UK and northern Europe offsetting
persistent weakness in the rest of the continent. In our opinion, China proved surprisingly
adept at managing slowing growth in 2013. The ongoing transition toward a consumer-
driven economy should provide modest incremental demand for a wide range of building
products. Companies with substantial international exposure include AWI (30% of sales),
MHK (30%), DOOR (27%), OC (25%), and MAS (20%).
Exhibit 47: Building products end markets (% of sales)
Ticker
New
Residential
Residential
R&R
New
Commercial
Commercial
R&R
Industrial /
Other Total International
AWI 10% 25% 20% 45% 0% = 100% 30%
BECN 15% 40% 10% 35% 0% = 100% 10%
CBPX 35% 20% 25% 20% 0% = 100% 10%
DOOR 25% 33% 5% 10% 27% = 100% 27%
FBHS 25% 57% 0% 5% 13% = 100% 17%
MAS 27% 73% 0% 0% 0% = 100% 20%
MHK 15% 60% 5% 20% 0% = 100% 30%
NCFT 33% 67% 0% 0% 0% = 100% 10%
NCS 0% 0% 90% 5% 5% = 100% 0%
OC 16% 35% 8% 14% 27% = 100% 25%
PGTI 28% 72% 0% 0% 0% = 100% 0%
USG 25% 23% 22% 28% 2% = 100% 20%
VMC 17% 0% 28% 0% 55% = 100% 0%

Source: Company reports and RBC Capital Markets estimates

May 2, 2014 40
Best ideas Building products New residential construction
and repair and remodel
FBHS (market cap: $6.6 B) is considered to be a best in class home products company with
strong brands that have leading market positions in cabinets, plumbing, security, and storage
products. We believe that the companys market cap makes the stock most suitable for
midcap investors with a high-quality bias looking to invest in an exceptionally well managed
growth company that has sustainable competitive advantage in the product categories in
which it competes.
MAS (market cap: $7.2 B) is a leading building products company leveraged to repair and
remodel spending. We believe that the companys market cap makes the stock a sensible
core holding for both hedge funds and long-only investors with a value bias looking for
exposure to an ongoing recovery in R&R spending.
MHK (market cap: $9.7 B) is the global leader in flooring products with leverage to a
recovery in both residential and commercial construction markets. We believe that the
companys market cap makes the stock most suitable for midcap investors with a growth
bias looking for exposure to an ongoing recovery in demand for flooring products across
multiple geographies.
NCFT (market cap: $275 MM) is a highly profitable cabinet manufacturer with the number-
two market position in the fragmented dealer channel. We believe that the companys
market cap makes the stock most suitable for small-cap value investors looking for exposure
to an ongoing recovery in R&R spending.
PGTI (market cap: $500 MM) is a high-margin niche manufacturer of impact-resistant
windows with a focus on the residential market in Florida. We believe that the companys
market cap makes the stock most suitable for aggressive small-cap investors with a growth
bias looking for exposure to an ongoing recovery in the Florida housing market.

May 2, 2014 41
Best ideas Building products Commercial construction
CBPX (market cap: $775 MM) is a leading manufacturer of gypsum wallboard with a top-
three market position in the Northeast, the Southeast, and the North Central regions. We
believe that the companys market cap makes it an attractive core holding for small-cap
cyclical investors looking for exposure to an ongoing recovery in both residential and non-
residential construction activity.
NCS (market cap: $1.2 B) has a leading market position in engineered steel products used
primarily in non-residential construction. We believe that the companys market cap makes it
most suitable for small-cap investors expecting a near-term rebound in commercial
construction.
VMC (market cap: $8.5 B) is the largest producer of aggregates in the US. In our view, VMCs
market cap makes the stock most suitable for midcap investors who are comfortable waiting
for the upside associated with owning a cyclical company that is still in the early stages of a
multi-year recovery.

May 2, 2014 42
Best ideas Home builders
LEN (market cap: $8.1 B) is the third-largest national builder and has a strong presence in the
California, Florida, and Texas markets. We believe that the companys market cap makes the
stock most suitable for midcap investors with a growth bias looking for a seasoned
management team that has assembled the premier land position in the industry.
PHM (market cap: $7.0 B) is the second-largest national home builder with a broad product
offering targeting first-time homebuyers, move-up buyers, and active adult customers. We
believe that the companys market cap makes the stock most suitable for midcap investors
with a value bias looking to benefit from gross margin expansion and stronger ROIC
performance.
KBH (market cap: $1.4 B) is a leading regional builder focused on the first-time homebuyer
with a strong presence in the California and Texas markets, which together account for 75%
of the companys land position. We believe that the companys market cap makes the stock
most suitable for small-cap investors seeking exposure to a well managed company that has
a strong land position in attractive markets.
BRP (market cap: $2.3 B) is a leading North American land developer and homebuilder,
which controls nearly 110,000 lots located in 11 markets in both Canada and the US. We
believe that the companys market cap makes the stock most suitable for midcap investors
with a growth bias looking for a seasoned management team that has assembled one of the
premier land positions in the industry.


May 2, 2014 43
US Commercial Banks
Gerard Cassidy
The banking industry is one of the most exposed industries to real estate as it makes the
majority of residential and commercial real estate loans. The vast majority of the banking
industry will likely benefit from a continued recovery in real estate. In the exhibits below, we
highlight the banks from the RBC Capital Markets coverage universe that will likely benefit
the most from the continued real estate recovery.
Exhibit 48 and Exhibit 49 rank the top 10 banks with the greatest percentage of loan portfolio
that is residential 1-4 family loans and the largest residential mortgage portfolios. We should
point out that exposure to a specific loan segment does not necessarily mean that the
company is a good investment. As an example, Hudson City Bancorp, Inc. (HCBK) has virtually
all of its loans in residential 1-4 family loans. Given that HCBK has had to restructure its
balance sheet and is pending a takeover from M&T Bank Corporation (MTB), we would
exclude HCBK from the list. What is important to consider is the amount of mortgage
originations a company produces, not simply the level of mortgages a company holds.
Exhibit 50 gives the listing of the top 10 mortgage originators in 3Q13. Our top five bank
stock selections that should benefit from a continued improvement in the residential real
estate sector include the following: BAC, JPM, STI, TCB and WFC.
Exhibit 48: RBC Capital Markets bank universe top 10 1-4 family residential loans by concentration
1-4 Family Loans (Balance and % of Total Loans) 1-4 Family Loans (Balance and % of Total Loans)
2010Y 2011Y 2012Y 2013Y
Company Ticker ($000s) (%) ($000s) (%) ($000s) (%) ($000s) (%)
1 Hudson City Bancorp, Inc. HCBK 30,924,716 99.7 29,345,457 99.7 27,129,708 99.7 24,171,513 99.7
2 Capitol Federal Financial, Inc. CFFN 5,040,520 98.2 5,152,854 98.4 5,568,081 98.5 5,946,757 98.6
3 Washington Federal, Inc. WAFD 6,411,403 73.4 6,167,429 74.2 5,759,657 70.9 5,548,501 69.2
4 Northwest Bancshares, Inc. NWBI 3,485,200 62.9 3,548,212 63.8 3,656,659 64.0 3,724,607 64.1
5 First Republic Bank FRC 12,785,899 68.7 15,346,849 67.8 18,508,174 65.7 21,681,906 63.7
6 City Holding Company CHCO 1,070,674 57.4 1,103,334 55.9 1,200,745 56.0 1,431,195 55.0
7 Bar Harbor Bankshares BHB 316,072 45.1 319,319 43.8 380,157 46.6 437,127 51.3
8 Community Bank System, Inc. CBU 1,403,692 46.3 1,598,052 46.0 1,850,666 47.9 1,965,120 47.8
9 Bank of Hawaii Corporation BOH 2,712,230 50.7 2,823,188 50.8 2,978,813 50.7 2,910,176 47.7
10 Webster Financial Corporation WBS 6,027,276 54.4 6,005,135 53.2 5,973,267 49.2 5,859,060 46.1

Source: SNL Financial, LC.

Exhibit 49: RBC Capital Markets bank universe top 10 1-4 family residential loans by amount
1-4 Family Loans (Balance and % of Total Loans)
2010Y 2011Y 2012Y 2013Y
1 Bank of America Corporation BAC 433,240,532 43.6 415,799,516 43.0 381,369,255 39.4 349,108,000 36.0
2 Wells Fargo & Company WFC 374,671,000 46.2 361,071,000 44.1 369,429,000 43.9 341,771,000 40.7
3 JPMorgan Chase & Co. JPM 249,758,000 34.4 231,880,000 31.2 214,362,000 28.3 208,135,000 27.2
4 Citigroup Inc. C 168,282,000 24.8 159,041,000 23.5 148,171,000 22.0 127,575,000 18.8
5 U.S. Bancorp USB 64,138,000 31.7 68,198,000 31.8 74,563,000 32.4 74,454,000 31.4
6 PNC Financial Services Group, Inc. PNC 52,319,349 33.9 49,316,613 30.4 53,462,813 28.2 52,902,695 26.7
7 SunTrust Banks, Inc. STI 48,562,849 40.7 47,892,144 38.4 45,919,087 36.8 44,135,807 34.1
8 BB&T Corporation BBT 35,627,916 33.2 39,434,519 35.5 44,066,511 37.2 41,369,171 35.3
9 Regions Financial Corporation RF 30,568,210 36.2 27,881,257 35.4 26,120,225 34.7 24,384,403 32.2
10 Hudson City Bancorp, Inc. HCBK 30,924,716 99.7 29,345,457 99.7 27,129,708 99.7 24,171,513 99.7


May 2, 2014 44
Exhibit 50: Top 10 residential mortgage originators 3Q13
($Ms)
Rank Company Location 2013Q3 2012Q3 Change Market Share
1 Wells Fargo & Company San Francisco, CA 81,718 140,675 -42.0% 21.1%
2 Chase Iselin, NJ 44,908 50,157 -10.0% 11.6%
3 Bank of America Charlotte, NC 24,429 21,248 15.0% 6.3%
4 Quicken Loans Inc. Detroit, MI 17,004 20,078 -15.0% 4.4%
5 CitiMortgage, Inc. O'Fallon, MO 16,597 16,563 0.0% 4.3%
6 U.S. Bank Home Mortgage Bloomington, MN 16,056 22,605 -29.0% 4.1%
7 PHH Mortgage Mt. Laurel, NJ 14,772 14,388 3.0% 3.8%
8 Branch Banking & Trust Company Wilson, NC 8,327 8,234 1.0% 2.2%
9 PennyMac Calabasas, CA 8,238 6,223 32.0% 2.1%
10 Nationstar Mortgage Lewisville, TX 8,042 1,818 342.0% 2.1%

Source: Mortgagestats.com.
Exhibit 51 and Exhibit 52 rank the top 10 banks with the greatest percentage of loan portfolio
that is in the multi-family sector and the largest multi-family mortgage portfolios. Again,
what is important to consider here is the amount of multi-family mortgage originations a
company produces not just the level of multi-family mortgages a company holds. Exhibit 53
gives the listing of the top 10 mortgage originators in 2012 based on the Home Mortgage
Disclosure Act (HMDA) data. Our top five bank stock selections that should benefit from a
continued improvement in the multi-family real estate sector include the following: JPM,
KEY, MTB, PNC and WFC.
Exhibit 51: RBC Capital Markets bank universe top 10 multi-family loans by concentration
Multi-family Loans (Balance and % of Total Loans) Multi-family Loans (Balance and % of Total Loans)
2010Y 2011Y 2012Y 2013Y
1 New York Community Bancorp, Inc. NYCB 16,800,422 57.5 17,439,071 57.5 18,609,100 58.6 20,717,282 62.9
2 Valley National Bancorp VLY 388,973 4.1 556,157 5.7 846,501 7.6 1,384,365 12.0
3 BankUnited, Inc. BKU NA NA NA NA 363,325 6.5 1,079,949 11.9
5 Bridge Bancorp, Inc. BDGE 9,217 1.8 21,384 3.5 66,069 8.3 107,534 10.6
6 Washington Federal, Inc. WAFD 684,988 7.8 701,143 8.4 704,363 8.7 787,492 9.8
7 Republic First Bancorp, Inc. FRBK 67,660 10.9 53,172 9.0 61,888 10.0 54,661 8.0
8 PacWest Bancorp PACW 454,668 11.1 335,977 9.5 267,433 7.5 343,495 8.0
9 East West Bancorp, Inc. EWBC 1,947,427 14.2 1,756,625 11.7 1,481,537 9.8 1,367,035 7.5
10 S&T Bancorp, Inc. STBA 190,137 5.7 191,501 6.1 198,590 5.9 253,276 7.1


Exhibit 52: RBC Capital Markets bank universe top 10 multi-family loans by amount
Multi-family Loans (Balance and % of Total Loans)
2010Y 2011Y 2012Y 2013Y
2 New York Community Bancorp, Inc. NYCB 16,800,422 57.5 17,439,071 57.5 18,609,100 58.6 20,717,282 62.9
5 U.S. Bancorp USB 4,027,000 2.0 3,905,000 1.8 4,408,000 1.9 4,283,000 1.8
7 M&T Bank Corporation MTB 1,976,239 3.8 2,669,559 4.4 3,580,823 5.4 2,964,385 4.6
10 Citigroup Inc. C 3,420,000 0.5 2,063,000 0.3 2,156,000 0.3 2,193,000 0.3


May 2, 2014 45
Exhibit 53: Top 10 multi-family mortgage originators 2012
Originations
Company Name 2012 2011 YoY % Chg
1 JPMorgan Chase & Co. 13,687,264 8,074,370 69.5%
2 Wells Fargo Bank, National Association 9,763,405 6,936,296 40.8%
3 Berkeley Point Capital LLC 7,690,480 7,148,698 7.6%
4 Berkadia Commercial Mortgage LLC 6,599,454 3,497,212 88.7%
5 Walker & Dunlop, Inc. 5,552,789 2,172,925 155.5%
6 M&T Bank Corporation 3,587,054 1,969,625 82.1%
7 Greystone Servicing Corporation, Inc. 3,156,316 1,356,080 132.8%
8 KeyBank National Association 3,140,956 3,326,045 -5.6%
9 PNC Financial Services Group, Inc. 2,668,741 2,964,855 -10.0%
10 M&T Realty Capital Corporation 2,403,202 1,456,283 65.0%

Source: SNL Financial, LC HMDA data.
Exhibit 54 and Exhibit 55 rank our top 10 banks with the highest percentage of the loan
portfolio that is in commercial real estate (CRE) loans and the largest CRE loan portfolios.
Total CRE loans are primarily mortgages collateralized by a variety of cash flowing
commercial real estate properties, i.e., office buildings, hotels, warehouses, apartments, etc.
Our top five bank stock selections that should benefit from a continued improvement in the
commercial real estate sector include the following: HOMB, PNC, UMPQ, WAL and ZION.
Exhibit 54: RBC Capital Markets bank universe top 10 CRE loans by concentration
Commercial Real Estate Loans (Balance and % of Total Loans) Commercial Real Estate Loans (Balance and % of Total Loans)
2010Y 2011Y 2012Y 2013Y
1 Republic First Bancorp, Inc. FRBK 325,693 52.5 348,955 59.1 360,922 58.4 410,171 60.0
2 Washington Banking Company WBCO 576,722 47.7 541,776 49.1 566,459 52.0 544,587 52.2
3 PacWest Bancorp PACW 2,427,385 59.1 2,134,747 60.3 1,973,205 54.9 2,138,328 49.6
4 Umpqua Holdings Corporation UMPQ 3,700,762 56.8 3,711,828 56.2 3,921,652 52.3 3,820,954 48.8
5 Bridge Bancorp, Inc. BDGE 240,443 47.7 294,890 48.0 344,633 43.2 481,463 47.5
6 Western Alliance Bancorporation WAL 2,168,901 51.2 2,414,024 50.5 2,733,297 47.9 3,212,603 47.2
7 Columbia Banking System, Inc. COLB 992,261 40.7 1,155,294 40.0 1,197,780 40.6 1,911,507 42.3
8 Cathay General Bancorp CATY 3,418,131 49.8 3,137,757 44.5 3,181,023 42.9 3,351,467 41.5
9 Home BancShares, Inc. HOMB 1,014,313 41.1 888,366 39.6 1,183,762 43.6 1,856,831 41.5
10 Westamerica Bancorporation WABC 1,152,736 39.5 995,929 39.5 818,461 38.8 714,504 39.1


Exhibit 55: RBC bank universe top 10 CRE loans by amount
Commercial Real Estate Loans (Balance and % of Total Loans)
2010Y 2011Y 2012Y 2013Y
4 U.S. Bancorp USB 25,163,000 12.4 26,225,000 12.2 26,459,000 11.5 26,263,000 11.1
8 Zions Bancorporation ZION 14,847,506 40.1 14,661,732 39.1 14,166,426 37.4 13,835,507 35.3
10 SunTrust Banks, Inc. STI 13,066,731 10.9 11,818,919 9.5 10,920,473 8.7 12,326,651 9.5


May 2, 2014 46
Exhibit 56 and Exhibit 57 rank our banking coverage universe by percentage of loan portfolio
that is construction and land development loans and the largest construction and land
development loan portfolios. Our top five ideas for construction and land development loan
exposure include the following: BXS, COBZ, HOMB, PB and WAL.
Exhibit 56: RBC bank universe top 10 construction and land development loans by concentration
Construction & Land Development Loans (Balance and % of Total Loans) Construction & Land Development Loans (Balance and % of Total Loans)
2010Y 2011Y 2012Y 2013Y
1 Home BancShares, Inc. HOMB 476,108 19.3 465,357 20.8 321,512 11.8 611,055 13.7
2 Prosperity Bancshares, Inc. PB 502,328 14.4 482,140 12.8 550,768 10.6 865,510 11.1
3 Glacier Bancorp, Inc. GBCI 654,334 17.1 475,729 13.4 405,555 11.5 449,641 10.9
4 CoBiz Financial Inc. COBZ 179,872 10.9 130,420 8.0 145,180 7.5 187,565 9.0
5 BancorpSouth, Inc. BXS 1,148,150 12.2 908,361 10.1 735,807 8.4 741,457 8.2
6 Western Alliance Bancorporation WAL 451,469 10.7 381,676 8.0 394,319 6.9 521,085 7.7
7 Metro Bancorp, Inc. METR 128,155 9.2 109,835 7.6 104,723 6.8 133,426 7.6
8 Washington Banking Company WBCO 179,972 14.9 128,539 11.6 102,686 9.4 78,355 7.5
9 Cullen/Frost Bankers, Inc. CFR 921,625 11.3 705,899 8.8 877,378 9.5 705,536 7.4
10 Hancock Holding Company HBHC 738,698 14.8 1,330,981 11.8 975,307 8.4 876,726 7.1


Exhibit 57: RBC bank universe top 10 construction and land development loans by amount
Construction & Land Development Loans (Balance and % of Total Loans)
2010Y 2011Y 2012Y 2013Y
3 U.S. Bancorp USB 10,571,000 5.2 8,427,000 3.9 6,586,000 2.9 7,797,000 3.3
8 Zions Bancorporation ZION 4,092,373 11.1 2,826,401 7.6 2,405,753 6.3 2,651,952 6.8
10 Comerica Incorporated CMA 3,023,288 7.5 2,033,317 4.8 1,596,537 3.5 2,011,053 4.4


May 2, 2014 47
Machinery
Seth Weber (Analyst) (212) 618-7545; seth.weber@rbccm.com
Well positioned for improving construction cycle
No doubt, many of the companies in our coverage universe stand to benefit from an
improving North American construction cycle. Whereas most of the heretofore strength in
the cycle has been on the residential side where most of our companies have comparably
little exposure we expect non-residential spending to slowly gain steam in 2014 with
additional improvement in 2015 and 2016.
Companies that should be well positioned include direct beneficiaries that manufacture or
rent construction equipment (e.g., Oshkosh, Caterpillar, Deere, Terex, H&E Equipment
Services and United Rentals) as well as less obvious participants, such as OEMs that make
vocational trucks used to haul construction materials (e.g., PACCAR, Navistar) or a
manufacturer of water infrastructure (e.g., Mueller Water). Expanding the non-residential
definition beyond the traditional commercial/retail/office, etc. to include categories such as
power and energy enhances crane manufacturer Manitowocs position significantly.
Exhibit 58: Construction machinery demand vs. non-residential spending

-30%
-20%
-10%
0%
10%
20%
30%
-60%
-40%
-20%
0%
20%
40%
60%
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
P
r
i
v
a
t
e

N
o
n
-
r
e
s

s
p
e
n
d

(
Y
/
Y

%

c
h
a
n
g
e
)
M
a
c
h
i
n
e
r
y

d
e
m
a
n
d

(
Y
/
Y
%

u
n
i
t
s
)
Manfredi machinery demand (LHS) Private Non-res constr. spend (RHS)

Source: Manfredi & Associates, Census Bureau

Exhibit 59: Non-residential segments; February construction spending
2013 non-res construction segments
Power
15%
Highway/ Street
14%
Education
14%
Manufacturing
9%
Commercial
9%
Transportation
7%
Healthcare
7%
Office
7%
Sewage/ Waste
4%
Other
14%
Other: Communications, Amusement,
Lodging, Water Supply, Pub Safety, Conservation,
and Religious

US Non-residential construction spend by segment, Feb 2014 (SAAR)
Other
0.3%
Healthcare
0.4%
Office
0.2%
Transportation
(1.2%)
Manufacturing
(0.1%)
Commercial
(0.3%)
Education
(1.1%)
Highway and Street
1.3%
Power
4.7%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
M
/
M

%

C
h
a
n
g
e

(
d
i
s
p
l
a
y
e
d
)
Bubble size corresponds to % of total Non-res spend
*Other includes Healthcare, Sewage/waste, Lodging, Communication,
Amusement, Water supply, Pub. safety, Conservation, and Religious

Source: Census Bureau

May 2, 2014 48
Per the US Census Bureau, US construction spending of $898b increased 4.8% in 2013, with
residential +17.5% and non-residential 1.5%. However, the overall spending level remains
23% below the 2006 peak, including residential off 46% and non-residential 21% (vs. 2008
peak).
Over time, US non-residential construction spending has tended to lag residential spending
by 12-18 months. With residential beginning its recovery in 2012, the relationship clearly
broke down this time around and has lagged for longer than expected for multiple reasons,
which we believe include the sluggish economic recovery, weak public spending (e.g.,
education -6%), and the significant activity that occurred last cycle e.g.,
office/retail/industrial vacancy rates were at elevated levels.
Exhibit 60: US construction spending
US residential vs. non-residential spending

-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
J
a
n
-
0
3
J
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4
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1
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J
a
n
-
1
3
J
a
n
-
1
4
Residential Construction Spending (% Change Y/Y)
Non-residential Construction Spending (% Change Y/Y)

Spending relative to peak split chart
$-
$100
$200
$300
$400
$500
$600
$700
$800
J
a
n
-
0
7
J
u
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-
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J
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$

b
i
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s
Private non-res Public Non-res

Looking ahead, we expect construction spending trends to improve, with residential
continuing to rise (RBC Capital Markets analyst Robert Wetenhall estimates ~1m starts in
2014, +9% y/y) and non-residential gaining traction. Our recent survey of US construction
contractors showed expanding project pipelines and improving sentiment.
Exhibit 61: RBC Construction Survey
Survey: Your current project pipeline vs. same time last year
25%
35%
40%
33%
21%
45%
16%
24%
60%
0%
10%
20%
30%
40%
50%
60%
70%
Smaller About the same Larger
Aug. 2013 Dec. 2013 Mar. 2014

Survey: Over the past three months, you have become
38%
31% 31%
20%
28%
52%
27%
29%
44%
7%
28%
65%
0%
10%
20%
30%
40%
50%
60%
70%
Less positive about the
business environment
No change to your
view
More positive about
the business
environment
Dec. 2012 Aug. 2013 Dec. 2013 Mar. 2014

Source: RBC Capital Markets Construction Survey (March 2014)

May 2, 2014 49
Also, commercial loan activity has begun to inflect and vacancy rates have started to decline,
which can be leading indicators.
Exhibit 62: CRE loans; Vacancy rates
CRE loans vs. non-res construction spend
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$400
$450
$500
$550
$600
$650
$700
$750
M
a
y
-
0
4
J
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-
0
5
S
e
p
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M
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J
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M
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-
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M
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-
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-
1
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M
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-
1
2
J
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1
3
S
e
p
-
1
3
$

b
i
l
l
i
o
n
s
$

b
i
l
l
i
o
n
s
Non-Res Construction (SA) CRE Loans, all commercial banks (SA)

Vacancy rates

2
4
6
8
10
12
14
16
18
1
9
9
9
A
2
0
0
0
A
2
0
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2
0
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A
2
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E
V
a
c
a
n
c
y

R
a
t
e

(
%
)
Apt Office Retail Warehouse Industrial

Source: Federal Reserve, Census bureau, REIS
We expect/our surveys suggest 2014 growth will be modest. Consistent with improving
project pipelines, close to two-thirds of responders in our most recent survey expect their
business in 2014 to be better than 2013, with roughly half expecting moderate improvement
and 16% significant improvement. In contrast, just 13% expect their business conditions to
be more challenging (21% expect 2014 to resemble 2013).
The commercial/retail sector appears to be a source of rising optimism, expanding for the
fourth consecutive survey, while industrial/manufacturing and residential/multi-family
remained well represented despite modest downticks from our prior survey. We note some
potential stabilization in the combined institutional/healthcare/education vertical after
seeing declines over the last two years.
Exhibit 63: RBC Construction Survey
Survey: business outlook for 2014
10%
13%
25%
34%
16%
6%
7%
21%
49%
16%
0%
10%
20%
30%
40%
50%
60%
Significantly
more
challenging
Moderately
more
challenging
About the
same
Moderately
better
Significantly
better
Dec. 2013 Mar. 2014

Survey: areas of expected increases in activity
0%
5%
10%
15%
20%
25%
R
o
a
d

b
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-
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r
Dec-12 Aug-13 Dec-13 Mar-14

Source: RBC Capital Markets Construction Survey (March 2014)

May 2, 2014 50
We prefer equipment rentals to most equipment OEMs
We view Top Pick-rated United Rentals (URI) and Outperform-rated H&E Equipment Services
(HEES) as best-positioned to benefit from an improving US construction cycle.
Our preference for equipment rentals is based on the view that URI generates roughly half of
its overall revenue from renting equipment and related products to North American
construction customers, with 46% going towards non-residential and 4% toward residential.
H&Es equipment rental business (34% of overall revenue) is similarly well positioned (all
domestic, with ~50% of revenue from the robust Gulf Coast region) and the company also
benefits from a construction equipment distribution business. Recently, H&E noted activity in
highway infrastructure, apartments, retail, office, and other construction projects as drivers
of rental revenue.
Although rising in recent years, we believe US rental penetration remains well below some
other developed countries. We see a continued shift toward increased use of the equipment
rental channel, with preference for larger/national rental operators versus
smaller/local/independents. The shift reflects equipment users that are facing increasingly
expensive and complicated new equipment (driven by engine emission mandates that have
not added commensurate functionality to the end-user), a shortage of good quality used
equipment, and elevated used equipment values that are pricing past buyers out of that
channel amidst a recovery where the slope of recovery has been hard to handicap.
Separately, we see URI benefitting from a trend toward increased outsourcing among its
growing Industrial customer base.
Exhibit 64: RBC Construction Survey; Rental rate growth vs. non-residential construction spend
When considering equipment needs, do you expect to
10%
8%
37%
44%
14%
13%
43%
30%
11%
9%
41%
39%
25%
7%
43%
25%
0%
10%
20%
30%
40%
50%
60%
Buy new equipment Buy high-quality
used
Rent equipment Use existing fleet
Dec. 2012 Aug. 2013 Dec. 2013 Mar. 2014

URI rental rate vs. Non-res construction spend, NSA
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1
Q
0
6
3
Q
0
6
1
Q
0
7
3
Q
0
7
1
Q
0
8
3
Q
0
8
1
Q
0
9
3
Q
0
9
1
Q
1
0
3
Q
1
0
1
Q
1
1
3
Q
1
1
1
Q
1
2
3
Q
1
2
1
Q
1
3
3
Q
1
3
URI rental rate Y/Y% Non-res spend (NSA) Y/Y%

Source: Company reports, Census Bureau, RBC Capital Markets Construction Survey (March 2014)
We prefer the equipment rental operators over most of the construction equipment OEMs,
since we believe much of the heavy lifting on their rental fleet replenishment has occurred
over the last several years (without a commensurate uptick in construction activity), and
incremental spend is more likely earmarked toward specialty products. Likewise, we believe
pricing on new construction equipment is relatively low (e.g., Caterpillar guiding to less than
0.5% pricing this year). Net, we see the rentals as well positioned to capture strong
incremental volume leverage as spending rises (i.e., higher equipment utilization should
drive rental rates). To that end, we estimate 2015 incremental/pull-through margins for URI
(total EBITDA) and H&E (equipment rental businesses) in the 55-60%+ range.

May 2, 2014 51
Exhibit 65: Rental company capex, AWP fleets vs. Non-res construction
Rental company capex (URI, HEES, AHT, HERC)
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
E
C
a
p
e
x

(
$
m
l
n
)
Rental Company Capex

AWP Fleets of Large North America Rental Operators vs. Non-Res Construction

150,000
170,000
190,000
210,000
230,000
250,000
270,000
$400,000
$450,000
$500,000
$550,000
$600,000
$650,000
$700,000
$750,000
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
U.S. Non-residential Construction Spending ($m)
North American AWP Fleet Size

Source: Company reports, RBC Capital Markets estimates
Although construction equipment inventories have improved over the last year and rising
construction activity would likely serve as a catalyst for all OEMs, we believe certain segments
offer greater potential than others as the cycle gains traction. To that end, we favor
Manitowoc, for its exposure to the crane cycle, which we see as in the early innings relative to
other equipment categories. When considering traditional commercial and residential
construction, we estimate Outperform-rated Manitowoc garners less than 10% of its overall
revenue from those North American markets; however, when the category is expanded to
include energy/power and infrastructure markets, we estimate the percentage rises to 30%.
Whats more, an improvement in non-residential construction spending should put upward
pressure on equipment utilization. Based on H&Es dollar utilization levels, we believe that
relative to aerials, cranes and earthmoving have more upside. Similarly, MTWs margins and
revenue are still furthest from peak relative to OSK and TEX; MTWs estimated 2014 crane
revenue ($2.6b) and margin (9.1%) will be 33% and 520 basis points below prior peaks, we
estimate OSK and TEXs FY14 access and aerial sales are at or approaching past peak.
Exhibit 66: Dollar utilization; FY14E vs. prior peak
H&E Dollar Utilization by Equipment Category

15%
20%
25%
30%
35%
40%
45%
50%
1
Q
0
6
3
Q
0
6
1
Q
0
7
3
Q
0
7
1
Q
0
8
3
Q
0
8
1
Q
0
9
3
Q
0
9
1
Q
1
0
3
Q
1
0
1
Q
1
1
3
Q
1
1
1
Q
1
2
3
Q
1
2
1
Q
1
3
3
Q
1
3
Hi-Lift Cranes Earthmoving
Prior peak

Revenue and margin vs. prior peak (TEX and OSK AWPs, MTW cranes)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
OSK (Access) TEX (Access) MTW (Cranes)
O
p
.

M
a
r
g
i
n
$

m
i
l
l
i
o
n
s
Prior peak FY14E Op. Margin

Source: Manfredi & Associates, Census Bureau
Elsewhere in our coverage, Outperform-rated Mueller Water Products generated 35% of
FY13 revenue from North American construction markets, primarily reflecting its Anvil
business (pipe couplings, etc.) which contributed 30% via non-residential applications, with
new residential construction adding another 5% (down from 30% prior peak). Mueller also

May 2, 2014 52
stands to benefit from a recovery in muni water system investment, driven by utility rate
increases and greater muni spend.
Among others, we estimate North America construction at 20% (+/- 5%) of revenue of Sector
Perform-rated Oshkosh and Terex, primarily reflecting access equipment sales, which we see
as moving deeper into the cycle. We approximate 60-65% of access equipment sales are
used for residential and non-residential construction, with aerial work platforms skewing
non-residential and telehandlers skewing residential. Both OSK and TEX also sell cement
mixers, which are well off the peak, while TEX offers leverage through some other
construction equipment categories, including cranes.
We estimate North America construction equipment will represent 15% of Sector Perform-
rated Caterpillars 2014 revenue, although that does not include related revenue from its
Power Systems business or FINCO. Likewise, we estimate 12% of Deeres (DE) overall
revenue is from North American construction markets. Separately, commercial vehicle OEMs
PACCAR and Navistar could benefit from an uptick in construction activity through sales of
vocational trucks. We estimate about 10% of Class 4/5 and 12% of Class 6/7 sales go to US
construction and believe less than 10% of Navistars FY13 sales went to US construction.
Exhibit 67: AWPs vs. cranes; RBC Crane Survey
North America AWP sales vs. North America crane sales
0
300
600
900
1,200
1,500
1,800
2,100
2,400
0
10
20
30
40
50
60
70
80
90
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
C
r
a
n
e

S
a
l
e
s
,

U
n
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t
s
A
W
P

S
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e
s
,

T
h
o
u
s
a
n
d

U
n
i
t
s
North American AWP Sales (units) North American Crane Sales (units)

Survey: Crane operators expecting to expand their fleets
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2
Q
0
9
3
Q
0
9
4
Q
0
9
1
Q
1
0
2
Q
1
0
3
Q
1
0
4
Q
1
0
1
Q
1
1
2
Q
1
1
3
Q
1
1
4
Q
1
1
1
Q
1
2
2
Q
1
2
3
Q
1
2
4
Q
1
2
1
Q
1
3
2
Q
1
3
3
Q
1
3
4
Q
1
3
1
Q
1
4
Expand

Source: Manfredi & associates, Company reports; RBC Crane Survey


May 2, 2014 53
Home Improvement
Scot Ciccarelli (Analyst) (212) 428-6402; scot.ciccarelli@rbccm.com
It is clear to us that investor opinions have shifted from a broadly bullish outlook on the US
housing market to a much more guarded/negative view in recent months due to softening
trends in several housing metrics since late 2013. Given this mixed data set, we continue to
believe that this Spring selling season will help provide a critical view into the overall health
of the US housing market. In other words, the next few months should help us determine if
the recent negative data points we have seen in the market are primarily a function of 1)
temporary factors such as the weather or 2) more ominously stemming from falling
affordability due to rising home prices and mortgage rates (i.e., demand destruction). In
addition, while less discussed, we also believe there is a third major factor that has had less
of a spotlight: 3) very low housing inventory levels.
OUR current view is that while demand may have softened somewhat from 1H/13 levels as
home prices and mortgage rates have increased (having a particularly large impact on
investment demand), severely limited housing supply levels have also adversely impacted
most housing metrics. While lean inventory will reduce housing turnover activity, it should
also support modest Y/Y home price appreciation and drive Y/Y growth in home-related
investment, as measured by Private Fixed Residential Investment (PFRI) spending.
Yes, weather has played some role in the limited inventory and transaction activity we have
seen in recent months, particularly in the northeast and Midwest regions. Our industry
contacts suggest that not only are people less prone to go house hunting during adverse
weather conditions, but realtors will even council their clients to not put their house on the
market until Spring weather starts to emerge. However, weather is a transitory issue and
will eventually get better.
We believe the bigger issue for supply, however, is that the home refinancing boom
experienced since 2009 has reduced the appetite for existing homeowners to move given
their currently low mortgage rates. These homeowners that have locked in low rates would
then have to swap into a higher interest rate mortgage if they were to buy a new home
today. So many people are content to stay where they are. This behavioral change has
limited the number of existing homes for sale and slowed housing turnover velocity. We
believe this environment (low inventory levels with firm/modestly improving prices) should
be favorable for Home Depot and Lowes, even if housing turnover levels remain subdued. In
our view, if homeowners are hesitant to sell because they do not want to lose their low-rate
financing, they may be more apt to spend money on improving their existing home.
However, if demand is still reasonably solid (our recent call with a housing/mortgage expert
suggested that a lot of people at least in the North East/Mid Atlantic regions are still getting
pre-qualified for mortgages so they are armed when they go house hunting), then supplies
should slowly improve. That is the nature of supply and demand. Thus, while we are
concerned that there has been some demand destruction from falling housing affordability
levels, limited inventory supplies are also heavily to blame. Assuming our view is correct and
that home supplies will slowly improve over time, then we would expect the housing
recovery to continue although we believe it will be at a much more moderate rate than we
have seen over the prior two years.
Our research has continued to show that the metrics that exhibit the tightest correlations to
home improvement activity and Home Depot and Lowes sales performance are existing
home supplies, Y/Y changes in home prices, and Y/Y changes in Private Fixed Residential
Investment (PFRI) spending. We also believe that housing related expenditures, like any
other major category such as food, should at least generally be in some normal proportion to

May 2, 2014 54
the size of the economy that is being measured. This is why we will look at the PFRI/GDP
ratio to provide guidance to longer-term movements in housing-related investment activity.
As shown below, the current PFRI/GDP ratio is still at roughly 3.1%, implying ~3.1% of the
countrys economic output is currently being spent on new home construction, home
remodeling, and home improvement activity. Real estate commissions are also included in
PFRI data, helping correlate PFRI data to home sales. While the magnitude of a potential
rebound in home investment spending is certainly up for debate, the current run rate still
seems depressed in our view, since the prior low in the PFRI/GDP ratio was 3.2% in 1982,
when homebuyers were faced with mid-teens mortgage rate.
Exhibit 68: Private Fixed Residential Investment as a % of GDP
4
Q
5
3
4
Q
5
8
4
Q
6
3
4
Q
6
8
4
Q
7
3
4
Q
7
8
4
Q
8
3
4
Q
8
8
4
Q
9
3
4
Q
9
8
4
Q
0
3
4
Q
0
8
4
Q
1
3
0%
1%
2%
3%
4%
5%
6%
7%
Historical average
4.6%
1Q14
3.11%
1Q67
3.48%
2Q70
3.87%
1Q75
3.78%
3Q82
3.22%
1Q91
3.47%

Note: Shaded areas represent recessionary periods, as defined by the National Bureau of Economic Research.
Source: RBC Capital Markets and Bureau of Economic Analysis

A closer look at the US housing market
Historically, after a sharp drop in housing-related activity (as measured by the PFRI dollar
spend and the PFRI/GDP ratio), the rebound from the trough has always exceeded the long-
term mean. However, as we will discuss below, while we continue to expect further PFRI
dollar growth over the next several years, we also believe that several factors will likely
impede the magnitude of recovery relative to historical patterns.
While we will discuss the obstacles that we see to the US housing market in more detail
below, we would note that housing-related investment is still quite depressed relative to the
size of the economy based on most historical measurements. Today, PFRI represents just
3.1% of economic activity (PFRI/GDP), leaving it below the previous historical low-points
experienced over the prior 60 years. Our current belief is that housing-related investments
(i.e., Y/Y growth in PFRI spending) will continue to grow, but we currently are assuming that
the growth rate will be at roughly half the rate that we have experienced over the prior two
years.
Historically, we have used Y/Y changes in PFRI as a predictive tool for our Home Depot and
Lowes research, rather than projecting PFRI itself. However, given our most recent data
points, conversations with industry contacts, and our view that low inventory levels have
been a significant contributor to some of the softening housing data that we have seen in

May 2, 2014 55
recent months, we do believe that the US housing market will continue to rebound from
recent cyclical lows. Specifically, we are currently projecting that PFRI dollars will continue
to grow at roughly 8% annually for the next few years versus the ~16% growth rate
exhibited in 2012 and 2013.
How do we get there?
While we are not firm advocates of mean-reversion theory, it does seem logical to us that
demand for certain large consumer spending categories such as food or clothing or
housing, should be some sort of normalized bucket over time, relative to the size of an
economy. With that in mind, we know that the mean Y/Y growth in PFRI dollars over the
prior two years has been ~16%. While the run rate in Q4/13 slowed to ~13% growth Y/Y, it is
probably fair to assume that adverse weather conditions had at least some negative impact
on Q3/13 PFRI data. For example, both Home Depot and Lowes estimated that their TOTAL
sales were negatively impacted by ~0.5%-1.0% from adverse weather conditions and we
suspect that new home construction activity and overall home sales were also impacted by
these weather conditions. Thus, assuming that PFRI would have been ~1% higher in Q4
without the adverse weather conditions, PFRI would have been ~$537 billion in Q4/13, up a
quite healthy ~15% Y/Y (or 17% growth on a two-year average basis) despite slowing
housing turnover and moderating home price appreciation rates.
Our projections assume a base case scenario of ~8% PFRI growth (roughly half the 4Q13 run
rate and two-year average) and GDP growth of 2.5%. Our chart below highlights what the
dollar growth would look like if PFRI were to grow by 4%, 6%, 8%, 10% and 12% and what the
PFRI/GDP ratio would look like assuming a steady-state growth rate of 2.5% for US GDP
(which could move higher depending on what happens with inflation rates).
Said another way, we estimate that in a base case scenario (GDP growth of 2.5% and PFRI
growth of ~8%), PFRI dollar spend in the US could reach ~$720-780 billion over the next four
to five years. This level of PFRI spend would put the PFRI/GDP ratio at 3.8%-4.0% by
2017/2018. Some investors would argue that these projections are too conservative given
the level of rebound we have seen historically, while others believe the housing recovery has
already run its course. We believe these forecasts are reasonable given our historical
analysis and current flow of data points.
Exhibit 69: Growth in GDP and PFRI
2013 2014E 2015E 2016E 2017E 2018E
GDP 2.5% $17,090 $17,517 $17,955 $18,404 $18,864 $19,335
PFRI Growth 4% 532 553 575 598 622 647
Ratio 2.5% 3.1% 3.2% 3.2% 3.2% 3.3% 3.3%
PFRI Growth 6% 532 563 597 633 671 711
Ratio 2.5% 3.1% 3.2% 3.3% 3.4% 3.6% 3.7%
PFRI Growth 8% 532 574 620 670 723 781
Ratio 2.5% 3.1% 3.3% 3.5% 3.6% 3.8% 4.0%
PFRI Growth 10% 532 585 643 707 778 856
Ratio 2.5% 3.1% 3.3% 3.6% 3.8% 4.1% 4.4%
PFRI Growth 12% 532 595 667 747 836 937
Ratio 2.5% 3.1% 3.4% 3.7% 4.1% 4.4% 4.8%
Base case

Note: 2013 GDP and PFRI based on 4Q13; Dollars in billions USD.
Source: RBC Capital Markets estimates and the Bureau of Economic Analysis

May 2, 2014 56
To put these PFRI levels in context, our projections are far more modest than what we have
seen from a historical rebound perspective. At the $532 billion run rate exhibited at the end
of 2013, our $720-$780 billion projection over the next five years (with a $750 billion mid-
point), would imply a still quite healthy increase in PFRI $ spend of ~$215 billion from todays
levels or a ~40% increase from the current run rate. However, it would still leave us about
$150 billion below the previous PFRI dollar peak of ~$900 billion in early 2006 (in an
economy that is $3.5 trillion or 25% larger today than it had been in Q1/06).
Exhibit 70: PFRI dollar level

896
859
814
781
749
717
672
616
566
538
507
452
406
376
392 395
383
401
366
375 377 381 387
398
418
426
444
469
490
513
533
534
532
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14
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)

Source: RBC Capital Markets and Bureau of Economic Analysis
As we will show below, we believe the prior PFRI peak was fueled heavily by home equity
extraction (which will be difficult to replicate given changes in the lending system and still-
depressed home price values) and will face a variety of other impediments. Nevertheless, we
believe that it is reasonable to assume that PFRI dollar spend could reach 3.8%-4.0% of
GDP over the next five years (with volatility), based on our historical analysis and current set
of data points. However, as we highlighted above, while we believe the assumptions in the
chart above are reasonable, several housing metrics have weakened over the last several
months and its unlikely that they are all weather related, particularly since some of the
weakening trends have been in the West where weather has been less of an issue. These
mixed data points have therefore increased the importance of this springs selling season in
our view.
Potential Impediments to the Housing Market
1) Less home equity usage We believe that substantial amounts of home equity
withdrawals/reinvestment back into home improvement projects played a major factor
in the most recent housing PFRI peak. The chart below, shows the unadjusted quarterly
data series for Active Mortgage Equity Withdraws in billions, and clearly demonstrates
that home equity withdrawals ramped up sharply during the peak housing bubble years.
We then adjusted the reported quarterly equity withdrawal figures that had been
previously reported by the government and simply multiplied each figure by four to help
it conform to the way PFRI is reported (which is a quarterly rate that is also annualized).

May 2, 2014 57
Exhibit 71: Quarterly unadjusted Active Mortgage Equity Withdraws in billions
-$10
$10
$30
$50
$70
$90
$110
$130
$150
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8

Note: The Federal Reserve stopped collecting data in 2008; Data not annualized.
Source: RBC Capital Markets and the Federal Reserve
While there is debate around how much mortgage equity withdrawal activity (MEW) was
reinvested back into home-related projects, a paper authored by Former Fed Chairman Alan
Greenspan suggested that roughly 30%-35% of all home equity loans, lines of credit and cash
out refinancing activity went specifically towards home improvement projects. Further, ~65%
of all home sale proceeds (calculated differently) went towards the purchase of another
home (i.e., rolling the equity in one structure into another) as well as towards commissions
and closing costs (real estate commissions are part of the PFRI calculations). Given these
estimates, we would suggest that 40%-50% of all home equity withdrawal activity went
towards housing-related investments and thus would have generally been reflected in the
reported PFRI data. Thus, we would estimate that ~40% of MEW went back into housing
related spending activity as measured by PFRI. The chart below shows a ~20 year graph of
PFRI in dollars (hollow lines), with 40% of the total annualized MEW amounts mapped
against it (shown with the darker lines).

May 2, 2014 58
Exhibit 72: 40% of Reinvested MEW vs. Residential Investment Spending in billions

($10)
$90
$190
$290
$390
$490
$590
$690
$790
$890
4
Q
9
4
4
Q
9
5
4
Q
9
6
4
Q
9
7
4
Q
9
8
4
Q
9
9
4
Q
0
0
4
Q
0
1
4
Q
0
2
4
Q
0
3
4
Q
0
4
4
Q
0
5
4
Q
0
6
4
Q
0
7
4
Q
0
8
4
Q
0
9
4
Q
1
0
4
Q
1
1
4
Q
1
2
4
Q
1
3
PFRI (in billions) 40%of Mortgage Equity Withdrawal (annualized, in billions)
Fed stopped releasing MEW
data after 4Q 2008
PFRI the last 3 quarters
was an average annualized
rate of $533 billion; down
40% from unadjusted peak

Note: Assumes that 40% of MEW was reinvested in home improvement spending; quarterly MEW figures have been annualized.
The Fed stopped recording (or at least reporting) mortgage equity withdrawal data in Q4/08.
Thus, it is difficult to see how this data has trended over the last few years as home prices
continued to plummet and then started to rebound. However, we do believe it is fair to
assume that PFRI would not have reached the levels that it did, without the usage of this
equity. In other words, the prior peak and averages were influenced by the usage of this
equity and even IF people wanted to pull out substantial amounts of equity in their homes
today, home prices are still ~18% below prior peak levels (judged by existing home prices).
While these factors could change over time, we show below what PFRI would look like if we
were to strip out 40% of home equity withdrawals. Thus, excluding 40% of MEW, we
estimate that PFRI would have reached ~$682 billion during its most recent peak, rather
than the nearly $900 billion figure that was recorded.

May 2, 2014 59
Exhibit 73: PFRI excluding mortgage equity withdraw that went towards home investment (estimated 40% of MEW)

$0
$100
$200
$300
$400
$500
$600
$700
4
Q
9
4
4
Q
9
5
4
Q
9
6
4
Q
9
7
4
Q
9
8
4
Q
9
9
4
Q
0
0
4
Q
0
1
4
Q
0
2
4
Q
0
3
4
Q
0
4
4
Q
0
5
4
Q
0
6
4
Q
0
7
4
Q
0
8
4
Q
0
9
4
Q
1
0
4
Q
1
1
4
Q
1
2
4
Q
1
3
When adjusted for 40%
reinvestment of MEW, the
average annualized rate of PFRI
at the 3 peak quarters was
~$205 billion less, or 23% lower
PFRI the last 3 quarters
was an average annualized
rate of $533 billion; down
22% from adjusted peak
PFRI, less 40% of
reinvested MEW, at
the 3 peak quarters
was an average
annualized rate of
$682 billion

Assuming tighter regulations and standards, more conservative lending practices and still-
currently lower home price values, which may limit the future use of home equity usage,
PFRI growth will be more limited than what we have seen during prior peak cycles. Further,
we have re-run our PFRI/GDP chart below using our adjusted PFRI figures (i.e., excluding the
estimated impact of MEW on the PFRI data). This exercise suggests that the most recent
housing bubble would have only resulted in a peak PFRI/GDP ratio of ~5% without
extensive use of MEW rather than the 6.5% that was recorded. It would also have lowered
the 60 year average PFRI/GDP ratio to 4.4% from 4.6%. These levels would compare to the
3.8%-4.0% PFRI levels that we cite in our Base Case ~8% PFRI growth scenario.

May 2, 2014 60
Exhibit 74: PFRI less MEW as a percent of GDP (estimated 40% of MEW)

0%
1%
2%
3%
4%
5%
6%
7%
1
Q
5
4
1
Q
5
9
1
Q
6
4
1
Q
6
9
1
Q
7
4
1
Q
7
9
1
Q
8
4
1
Q
8
9
1
Q
9
4
1
Q
9
9
1
Q
0
4
1
Q
0
9
1
Q
1
4
PFRI less 40%MEW Reinvestment/GDP
PFRI as a %of GDP
Historical average PFRI
4.6%
Historical average PFRI
less 40% MEW Reinvestment
4.4%
PFRI less 40% MEW
Reinvestment / GDP

While we believe lower mortgage equity withdrawal/reinvestment rates will reduce the
longer-term upside potential of home-related investment, it is unfortunately not the only
impediment that we see. Below, we highlight three additional factors that could pressure our
longer-term PFRI projections.
2) Uncharted impact of large investors in the single-family home market Investors
have made a material contribution towards improving the supply/demand dynamics of
the single-family home market since 2008. Large investors such as Blackstone and
American Homes for Rent have literally invested billions of dollars into buying portfolios
of single-family homes, which helped to absorb a lot of the excess supply on the market
and has helped drive up home prices as supply deficits grew. However, we also believe
that the ownership nature of a home matters from a home investment perspective, as
investors typically will not put as much capital towards improving a home as a single
family homeowner would (for investors it is purely a financial investment, where
homeowners make lifestyle investments via home improvement activity). While some of
this investor-owned single-family home inventory may be resold to individuals and the
historical patterns of home maintenance/ improvement can begin again, we suspect
that home improvement activity will remain depressed for the inventory that stays in
investor hands.
3) Demographic changes While these are likely longer-term cyclical concerns, we believe
that generational changes could have an adverse impact on the appreciation rate of
single-family homes in the US for an extended period of time. Boomers Historically,
older homeowners tend to downsize as the family unit matures and kids go off to
college or move out on their own. While this process may be super bullish for
condominiums in Florida or Arizona, we believe it could adversely impact broader single-
family home price trends as Boomers become net sellers rather than net buyers of
single-family homes. Millennials Meanwhile, the Millennial generation, which should
be the building blocks of the housing market as first time buyers, has been much slower
to get married, start families and buy a home than most prior modern generations.
While some of these changes may stem from different social behaviors and activities, we
believe some of it is also a result of sluggish economic growth and tighter credit
markets/high down payment requirements. It is probably also worth noting that many

May 2, 2014 61
people in this generation witnessed sharp depreciation in their parents homes (which
was often their parents largest asset). As a result, this may reduce their own willingness
to lock up a lot of capital in a single, somewhat illiquid asset. To be fair, all the Boomers
wont hit the Sell button at the same time and Millennial behaviors may change as they
enter the parenting stages of their lifecycle. Nevertheless, we believe that these
generational changes could reduce home price appreciation rates for a long period of
time and, as we show below, home price appreciation rates are highly correlated with
PFRI dollar spend.
4) More rigid lending standards/regulations While banks could loosen their lending
standards if the economy continues to improve and/or they get more confident in
housing collateral, we also believe that certain recent legal changes will make the
lending environment more difficult than what we have seen in prior cyclical upturns. For
example, FHA loans have become a popular low down payment option (just 3.5%) for
mortgage seekers that could not afford a more typical 20% down payment for a
standard mortgage. However, as of June 2013, FHA loans started to require private
mortgage insurance (PMI) for the life of a loan rather than until an owner built up 20%
equity, which significantly increases the effective costs of FHA loan options. Further,
sweeping changes from the Dodd-Frank bill have increased the potential liability of
mortgage lenders, if they extend a loan to a homebuyer that the buyer could not afford
based on pre-established criteria. However, even in the face of these higher regulatory
hurdles some banks have recently started to loosen lending criteria under certain
circumstances, especially as mortgage refinance activity has slowed. For example, TD
Banks Right Step program recently lowered their down payment requirements from
5% to 3% to ease the capital crunch on first time and moderate home price buyers.
Overall, while some banks seem to be easing lending criteria for home purchases, some
of todays new regulations may keep the housing market from reaching the frothiness
we saw in the early 2000s.

Based on our Base Case PFRI growth assumptions, what are the implications for
HD and LOW?
As stated above, we continue to believe that the most important macro housing-related
factors for the home improvement retailers are existing home supplies, Y/Y changes in home
prices and Y/Y changes in PFRI. As we have demonstrated over the years, changes in existing
home supplies lead Y/Y changes in home prices by nearly six months. In the graph below, we
show the inverse correlation between these two indicators, with the implication that when
monthly home supplies are at ~7.0-7.5 months or less, home prices tend to be in
appreciation mode. On the flip side, when home supplies balloon beyond this level, it will
typically lead to home price declines.

May 2, 2014 62
Exhibit 75: Existing home supply versus Y/Y% Change in existing home prices

2
4
6
8
10
12
4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 4Q11 4Q12 4Q13
E
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,

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d
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Y
O
Y

%

C
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n

H
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P
r
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s
Existing Home Months Supply - Inverted, 6 months Advanced Existing One-Family Home Median Price, YOY%Change

Source: RBC Capital Markets and National Association of Realtors
Our research has also shown the tight correlation between Y/Y changes in home prices and
Y/Y changes in PFRI dollar spend. When scaled properly, our analysis shows that when home
prices are appreciating, PFRI spending tends to increase on a Y/Y basis. Said another way,
when home prices are increasing, people tend to spend more money on their homes and
vice versa. We believe this is because when home prices increase, consumers view home-
related spending as an investment (easier to justify) and when home prices are declining,
they view home-related spending as a true expense (harder to justify). While this conclusion
should seem fairly logical to most investors, our chart below helps quantify this observation.

May 2, 2014 63
Exhibit 76: Y/Y % changes in home prices correlated with Y/Y % changes in Private Fixed Residential Investment

-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
3Q04 3Q05 3Q06 3Q07 3Q08 3Q09 3Q10 3Q11 3Q12 3Q13
Y
O
Y

%

C
h
a
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i
n

H
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P
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s
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Y
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%

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t
YOY %Change in NAR Median Price for Existing One-Family Home YOY %Change in Private Fixed Residential Investment $

Source: RBC Capital Markets, Bureau of Economic Analysis, and National Association of Realtors
Finally, we do believe that Y/Y changes in PFRI matter to Home Depot and Lowes sales
growth. Specifically, as we have shown over the last several years, when we look at Y/Y
changes in PFRI, scale it properly, and then compare these changes to Home Depot and
Lowes same store sales performance, we have one of the tightest correlations we can find
between a macro factor and a specific companys fundamental performance.
Exhibit 77: Home improvement retail sales correlated with Y/Y % changes in Private Fixed Residential Investment

-40%
-30%
-20%
-10%
0%
10%
20%
30%
4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 4Q11 4Q12 4Q13
Y
O
Y

%

C
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-16%
-12%
-8%
-4%
0%
4%
8%
12%
H
D

a
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d

L
O
W

C
o
m
p
s
YOY %Change in Private Fixed Residential Investment $ Lowe's Comps Home Depot Comps

Source: RBC Capital Markets, Bureau of Economic Analysis, and company reports

May 2, 2014 64
Based on the these historical correlations, if PFRI were to continue to grow at ~8% annually
(our Base Case Scenario) until the PFRI/GDP ratio approaches the 3.8%-4.0% range, it would
imply that Home Depot and Lowes should generally be able to generate 3%-4% comp
growth over the next several years. This outcome would essentially be in-line with our
current fundamental forecasts for both of these companies. While store growth for these
companies is minimal, we do believe that both of these companies can generate meaningful
earnings leverage with 3%-4% same store sales growth. For example, while it changes
quarter to quarter, both companies still use a general rule of thumb of 20 bps of SG&A
leverage for every point of comp. Using this metric, even without store growth, 3%-4% comp
growth should generate 10%-13% EBIT $ growth and 15%-20% EPS growth depending on the
pace of their buyback activities.
Since their relative multiples have already started to compress over the last 9-12 months, we
believe that HD and LOW shares could generate solid performance over the next few years
as the stocks better track their earnings growth.
Exhibit 78: Performance of HD and LOW (Indexed to 100)

95
105
115
125
135
145
155
Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14
SP 500
S5RETL Index
HD
LOW

Note: Priced at market close on 4/30/14.
Source: RBC Capital Markets

The case for Home Depot over Lowes
While we continue to believe both HD and LOW will benefit from the continuing recovery in
the US housing market, we still believe that significant differences in Pro sales/store, will
likely keep the margin gap between the two wider than we think is generally expected by
most investors.
As we have continued to note, Lowes has less exposure to Pro customers than Home Depot
(~25% of sales vs. 35% for Home Depot). Based on annual sales per store of ~$35 million for
Home Depot and ~$30 million for Lowes, the math suggests that both companies generate
roughly $23 million in annual sales/store on the DIY side, while Home Depot generates $4.5-
$5.0 million more per store in Pro sales ($12.2 million vs. $7.6 million). In other words, the
entire sales per store difference between the two retailers comes from their respective
penetration with pro customers, rather than DIY consumers.

May 2, 2014 65
Exhibit 79: Home Depot Has Greater Exposure to Pro Customers
Sales / store* Pro customers Pro customer DIY customers DIY customer
as % of mix** sales / store*** as % of mix sales / store***
Home Depot $34.9 35% $12.2 65% $22.7
Lowe's $30.4 25% $7.6 75% $22.8
Home Depot $4.6m or
61% more in Pro Sales
than Lowe's
DIY customer sales per store
relatively similar at Home Depot
and Lowe's

*Trailing 12 months as of 4Q FY13, in $ millions; **Company estimates; ***RBC Capital Markets estimates
Source: Company reports and RBC Capital Markets estimates
We believe this difference is largely structural since 1) a lot of Pro business is concentrated
around major metro areas, 2) Home Depot has a real estate density advantage in major
metro areas relative to Lowe's, and 3) Lowes is not adding any more stores. We further
believe that Home Depot has improved their execution/customer service capabilities on the
Pro side, so that customers are now less willing to drive past a Home Depot to get to a
Lowe's than they were in the early/mid-2000s.
The structural difference is important because both Home Depot and Lowes have continued
to see sales to professional contractor customers outperform DIY sales over the last several
quarters, and we expect that this trend will likely continue as the housing market recovers
and consumers look to spend more on bigger-ticket home projects. However, Lowes has
continued to focus more of its efforts on Pro customers and has highlighted its plans to
effectively re-launch Lowes for Pros, which is expected to improve both the product
offerings and service offerings to the companys Pro customers. While we still believe that
real estate differences may limit Lowes upside potential on the Pro side (since a lot of the
Pro business is generated around major metro areas), we believe it would be a sizable
positive for Lowes if it were able to narrow its sales/store gap against Home Depot on the
Pro side.
Exhibit 80: Home Depot has been outperforming Lowes on EBIT per store since Q2/09

$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
$5.0
4Q05 4Q06 4Q07A 4Q08A 4Q09A 4Q10A 4Q11A 4Q12A 4Q13A
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(
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)
LOW HD
As of 4Q13, over the trailing 12
months, Home Depot was
~$1.680 million, or ~71%, more
profitable on a per store basis
than Lowe's

Source: RBC Capital Markets and company reports

May 2, 2014 66
Business, Information and Professional Services
Residential Real Estate Brokerage
Sun-Il (Sean) Kim (Analyst) (212) 428-2363; sean.kim@rbccm.com
US existing homes sales have been weak in recent months, but
we expect a stabilization followed by modest growth
Operating fundamentals in the residential real estate brokerage business are highly
dependent on US existing home sales. More than 80% of Realogys revenues are generated
from real estate transaction-based commissions (or royalties on commissions), which are
highly correlated to existing home sales dollar volume (refer to our initiation report for
further details). About 60% of RE/MAXs revenues are generated from fixed fees assessed on
a per-agent basis; another ~15% of revenues (broker commissions) are tied, at least in part,
to agent count. Agent count is generally dependent on the overall transaction environment
(i.e., existing home sales volume).
Given the weakness in existing home sales in recent months, sentiment on brokerage stocks
has not been good (to say the least). At the same time, price continues rise due to tight
inventory conditions; therefore, total transaction dollar volume is still up Y/Y (though barely
in Q1/14).
Exhibit 81: Monthly US existing home sales and Y/Y growth
150
200
250
300
350
400
450
500
550
2
0
1
1

-
J
a
n
2
0
1
1

-
F
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-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Exi sti ng home sal es (000s) YoY growth

Source: RBC Capital Markets Research, NAR


May 2, 2014 67
The good news is that existing home sales of 5.09MM in 2013 (4.59MM SAAR in March 2014)
was far from cycle high of 6.5MM in 2005 (cycle low was 3.8MM in 2008).
Exhibit 82: US existing home sales and economic cycles
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013
Non-Recession years Recession years
March 2014 SAAR

Source: RBC Capital Markets Research, NAR
Further, current housing turnover (i.e., existing home sales as a percentage of total housing
units) of ~3.45% (based on March 2014 SAAR) is at a level not seen since the early- to mid-
1990s, excluding the latest downturn.
Exhibit 83: US housing turnover
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013
Non-Recession years Recession years
Based on March 2014
SAAR

Source: RBC Capital Markets Research, NAR, US Census Bureau
While the potential for rising mortgage rates has been a concern, they are still very close to
historical trough levels and NARs housing affordability index is materially above historical
norm, indicating US consumers are still in a relatively good environment in which to buy a
home. Further, roughly one-third of home purchases are all-cash transactions, according to
NAR, making the residential market somewhat less sensitive to rates than one might think.

May 2, 2014 68
Exhibit 84: US housing affordability index is above historical norm
95.00
115.00
135.00
155.00
175.00
195.00
215.00
Mar-
01
Dec-
01
Sep-
02
Jun-
03
Mar-
04
Dec-
04
Sep-
05
Jun-
06
Mar-
07
Dec-
07
Sep-
08
Jun-
09
Mar-
10
Dec-
10
Sep-
11
Jun-
12
Mar-
13
Dec-
13

Note: Grey line represents the average over the period.
Source: NAR, RBC Capital Markets Research

Exhibit 85: US mortgage rates are near all-time lows (30-year fixed-rate mortgage rate)
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
1
9
7
3
1
9
7
4
1
9
7
6
1
9
7
7
1
9
7
8
1
9
8
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9
8
1
1
9
8
3
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9
8
4
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8
6
1
9
8
7
1
9
8
9
1
9
9
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9
9
2
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9
9
3
1
9
9
5
1
9
9
6
1
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9
8
1
9
9
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2
0
0
1
2
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2
2
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4
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5
2
0
0
7
2
0
0
8
2
0
1
0
2
0
1
1
2
0
1
3

Note: Grey line represents the average over the period.
Source: Primary Mortgage Market Survey, RBC Capital Markets Research
Therefore, unless we are heading into another downturn (which we do not think is the case),
the recent negative turn in existing home sales is likely to stabilize, and the trend should
return to a modest long-term growth trajectory, in our view. We note that US existing home
sales (number of transactions) are expected to be flat-to-up low-single digits in 2014 and up
mid-single digits in 2015 (based on Fannie Mae, NAR, and Freddie Mac forecasts). The
average home sales price is expected to grow mid-single digits in 2014 and 2015. These
forecasts would drive mid-to-high single-digit dollar volume growth in 2014, and high-single-
digit growth in 2015, which would represent a stable housing macro, and a relatively sound
operating environment for brokerage firms.

May 2, 2014 69
Our proprietary agent count tracker indicates the business
outlook may be better than what recent home sales figures
suggest
We publish a monthly report titled RBC Real Estate Agent Tracker Monthly, which provides
investors with an update on agent and office count (based on proprietary data) of several of
the largest residential real estate brokerage networks, including RE/MAX, Coldwell Banker
(Realogy), Century21 (Realogy), ERA (Realogy), and Sothebys (Realogy); click here for the
April 2014 issue of the report.
Overall, agent count has been trending up so far this year at the major brokerage networks
we track, albeit after a shaky start for some.
Key takeaways for RE/MAX continued steady US agent growth; Canada appears stable:
RE/MAX ended Q1/14 with 55,164 US agents (up ~5.6% Y/Y), an increase of 673 from the
reported 54,491 agents at the end of Q4/13. Guidance is for 4%-4.5% Y/Y global agent
growth, with US at the higher end of the range.
US agent count continues its steady climb so far in 2Q. Our data shows 55,441 US agents
as of April 21, up 277 so far in the quarter.
RE/MAXs Q1/14 quarter-end agent count in Canada (19,017) was up by 95 from the
reported 18,922 for quarter-end Q4/13. On a Y/Y basis, Canada agent count was up
~0.7% at the end of Q1.
As of April 21, our data shows 19,043 agents in Canada, indicating continued stability in
the region. Given RE/MAXs already dominant share in Canada, we expect minimal agent
growth in the country.
RE/MAXs US + Canada agent count as of quarter-end Q1/14 (74,181) was up ~4.3% Y/Y
(vs. guidance of 4%-4.5% Y/Y global agent growth). US + Canada account for 90%+ of
RE/MAXs total revenue base.

Key takeaways for Realogy US agent count bouncing off what appears to have been a
weak start to the year (especially at Coldwell Banker):
At flagship Coldwell Banker, Q1/14 quarter-end US agent count (77,316) was basically
flat from the beginning of the quarter, after being down by as much as 410 during the
quarter.
As of April 21, US agent count at Coldwell Banker is up by 271 since the end of Q1/14,
and up by 682 since the bottom in early February.
At Century21 (Realogys second largest brokerage network) Q1/14 quarter-end US agent
count (53,007) was up by 113 since the beginning of the quarter, after being down by as
much as 206 during the quarter.
As of April 21, US agent count at Century21 is roughly flat since the end of Q1/14 (down
by just 20).
Sothebys US agent count was up by 625 during Q1/14 (to 13,222), and is up by another
98 agents since the end of Q1 (as of April 18). We think the robust growth in Sothebys
agent count this year likely is driven by both new franchisee additions as well as
organic (i.e., same-office) growth given the relative strength in the luxury/high-end
market which Sothebys caters to.
ERAs US agent count ended Q1/14 down by 532 (to 13,119), after being down by as
much as 670 agents during the quarter. So far in April (as of the 18
th
), agent count
appears to have recovered further (up by 181 this month).


May 2, 2014 70
Other data points have begun to show more encouraging signs
for future home sales
Web traffic data (unique visitors) for the largest real estate listings sites (Zillow.com,
Trulia.com, Move/Realtor.com) broadly are beginning to show improving growth (on Y/Y
basis) in March after several months of declines:
At Trulia.com, Y/Y unique visitor growth was negative for four consecutive months
through February, but turned positive in March (+1.1%).
At Move, Y/Y unique visitor growth was negative for five consecutive months through
February, but turned positive in March (+1.2%).
At Zillow.com, Y/Y unique visitor growth has remained up solidly in the double-digit
range.

Further, total property listings on Realtor.com were up materially (on Y/Y basis) in February
and March (by ~10%) after flattish or slightly negative growth for several months. We do
acknowledge that median age of inventory has also gone up, so listings may be staying on
the site longer.
With traffic trends at listings sites potentially turning, listings volume increasing (after several
months of subdued/negative growth), and our proprietary data that shows broadly
improving US agent count at several major brokerage networks, we wonder if home sales
declines will stabilize and return to modest growth in the not-too-distant future.
We have a favorable view of both Realogy and RE/MAX, but
think there is greater risk/reward potential for Realogy,
especially once US existing home sales stabilize
Given our view that we are not about to enter another housing downturn and the recovery is
likely to continue longer term, we think Realogy and RE/MAX are both very attractive ways
to play the home sales recovery.
Our call on RE/MAX: We expect few surprises when it reports Q1 earnings and are looking
for at least in-line results with little risk to guidance (in terms of core operating trends; FX
could have some negative impact), as suggested by our agent data. The stock was reset
after Q4 earnings as public company costs were incorporated, and we view the current level
as an attractive entry point.
Our call on Realogy: Sentiment has been quite negative, due largely to soft existing home
sales in recent months. That said, we do not think we are entering a new downtown, and our
agent count data (as well as other data points mentioned earlier) indicates that the business
outlook may be better than what recent home sales figures suggest. We believe the decline
in home sales will stabilize and continue on a longer-term modest growth trajectory, which is
what is implied by our current estimates. In that case, the stock is trading at just ~11x 2015E
FCF. So, overall we see greater risk/reward potential for Realogy vs. RE/MAX.


May 2, 2014 71
Electrical Equipment/Multi-Industry
Jamie Sullivan, CFA (Analyst) (212) 428-6465; jamie.sullivan@rbccm.com
EE/MI Exposure to construction end-markets
In Exhibit 86, we detail the companies in our Electrical Equipment/Multi-Industry coverage
with material exposure to non-residential and residential construction, led by Watts Water
and Ingersoll-Rand.
Exhibit 86: Percent of total revenue exposed to construction, FY2013
Company Non-Residential Residential Total Commentary
Watts Water (WTS) 50% 50% 100%
75% of WTS residential exposure is to repair/replace vs. new.
Products include flow control (resi & commercial), HVAC & gas,
drains & water re-use, water quality
Ingersoll-Rand (IR) 47% 15% 62%
85% of IR residential exposure is to replacement vs. new. Products
include HVAC equipment and HVAC services to commercial and
residential. Non-res total (47%) comprised of 29% non-res N.A. and
18% non-res overseas
Ritchie Bros. Auctioneers (RBA) 50% - 50%
Construction represents 50% of used equipment auction
consignors; we assume the majority for non-res
Regal Beloit (RBC) 10% 39% 49%
Residential is primarily residential HVAC, non-HVAC resi includes
pools, garages, spa etc. Commercial includes construction and
commercial HVAC
Mobile Mini (MINI) 36% not quantified 36%
Customers include electrical, plumbing/mechanical contractors,
landscapers, equipment rental cos. A portion of the 36% includes
resi homebuilders. MINI has additional non-res exposure via
Consumer & Retail end market (also 36% of revenues)
Emerson Electric (EMR) 11% 10% 21%
Non-resi includes commercial HVAC (in Climate Tech), construction
end market of Indu-Automation, commercial end market of
Commercial & Resi Solutions. Resi primarily HVAC. EMR percentages
represent global exposures
Actuant (ATU) 12% - 12%
Includes Integrated Solutions business (high-force hydraulics used
in major infrastructure projects) as well as off-highway end market
Parker-Hannifin (PH) not quantified 4% 4%
Residential includes refrigeration & AC markets. Non-res exposure
not quantified via construction machinery end market, within
Motion Systems platform
Exposure by Construction Market

Source: Company reports, RBC Capital Markets

Residential construction
Outlooks suggest mid-teens growth in starts to support mid-single-digit growth in HVAC.
Companies in our coverage with material exposure to residential construction include Watts
Water, Regal Beloit, Ingersoll-Rand, and Emerson. Watts has the highest exposure in our
coverage at 50%, though we note repair/replace is currently ~75% of its residential exposure.
IR has 15% exposure to residential HVAC, though ~85% of that is replacement (vs. new).
Watts product lines include a number of flow control, drainage, and filtration products for
residential application, while Regal, IR, and Emerson are exposed primarily through HVAC.

May 2, 2014 72
Company/OEM commentary points to mid-single-digit growth in residential HVAC during
2014:
Ingersoll-Rand/Trane expects mid- to high-single-digit growth in residential motor-
bearing unit (MBU) shipments for the year, with strength in the residential builder
market and moderate replacement demand
Regal Beloit expects resi HVAC to grow mid-SD
Lennox International forecasts N.A. resi HVAC shipments up mid-single digits
United Technologies/Carrier forecasts resi HVAC up mid-to-high single digits

On the entire residential market:
Watts Water cites industry forecasts calling for 19% growth in housing starts in 2014, 4%
growth in existing home sales, and double-digit growth in repair/replace
Ingersoll-Rand forecasts residential housing starts up mid-teens in 2014

Nonresidential construction
We look at a broad definition of nonresidential construction that includes public/
government spending and areas such as power and communication. These end-markets
contribute to electrical, HVAC and equipment products and services sold by the group, and
therefore are important in analyzing the cycle, in our view. We also utilize the Census Bureau
definitions of the various nonresidential markets and the put-in-place values (i.e., the dollar
value of construction work) contributed by the various nonresidential markets. The Census
Bureau nonresidential construction categories often differ from those of common industry
sources, such as the American Institute of Architects (AIA), that exclude several categories of
construction spending. We believe there are several important factors to consider when
evaluating the trajectory of a nonresidential market recovery:
Defining Commercial construction. Nonresidential and Commercial construction are often
used interchangeably. The Census Bureau definition of Commercial construction includes
Automotive (e.g., dealerships, showrooms, service centers, gas stations, parking);
Food/beverage (e.g., supermarkets, convenience stores, restaurants, bars, liquor stores);
Multi-retail (e.g., department stores, shopping centers/plazas, malls); Other commercial
(e.g., salons, florists, dry cleaners). The distinction is important as the definition of
Commercial often includes other categories. For example, the American Institute of
Architects (AIA) combines Office, Retail, Hotel and Other into its definition of Commercial
construction. The Census Bureau also does not have an Institutional category, which AIA uses
to define Health, Education, Religious, Public Safety and Amusement & Recreation.
The largest nonresidential markets are often excluded from the nonresidential
construction discussion. Power, Highway/street and Transportation represent over 35% of
nonresidential construction spending; however, these categories are often excluded when
discussing nonresidential construction. For example, these categories are not included in the
AIA definition of nonresidential construction, as shown in Exhibit 88 below. We believe these
areas should be included in the discussion for companies selling electrical equipment and
machinery used in or installed in these projects. Additionally, some categories are largely
derived from Public spending, such as Education (~80%), Highway & street (100%) and
Transportation (70%).

May 2, 2014 73
Exhibit 87: Census Bureau breakdown of US nonresidential construction put-in-place, 2013
Power, 15%
Highway and street
(Public), 14%
Educational, 14%
Commercial, 9%
Manufacturing
(Private), 9%
Transportation, 7%
Health Care, 7%
Office, 7%
Sewage and Waste
Disposal (Public), 4%
Communication
(Private), 3%
Amusement and
Recreation, 3%
Lodging (Private), 2%
Other, 6%


Exhibit 88: AIA and Census Bureau nonresidential market breakdown, 2013
AIA Nonresidential markets
Not Included (Transpo,
Comm, Power,
Highway & street,
Sewage & waste, Water
supply, Other), 47%
Institutional (Health,
Education, Religious,
Public Safety,
Amusement & Rec),
26%
Commercial (Office,
Retail & Other Comm,
Hotel), 18%
Industrial, 9%

Census Bureau Nonresidential markets
Power, 15%
Highway and street
(Public), 14%
Transportation, 7%
Other, 10%
Educational, 14%
Health Care, 7%
Amusement and
Recreation, 3%
Public Safety, 2%
Religious (Private), 1%
Commercial, 9%
Office, 7%
Manufacturing
(Private), 9%

Source: AIA, Census Bureau, RBC Capital Markets estimates
Public nonresidential spending is material. Public (Federal, State and Local) nonresidential
construction put-in-place values averaged 47% of total over the last 10 years, and was 47% of
2013 put-in-place values. State and Local nonresidential construction is the vast majority of
Public put-in-place values, averaging 92% of Public nonresidential construction put-in-place.
In our view, the trajectory of State and Local construction is an important contributor to the
recovery in non-residential construction. The AIA does not include Public spending its
consensus forecast.

May 2, 2014 74
Exhibit 89: Breakdown of US nonresidential construction put-in-place, 2013
Private, 53%
State & Local,
43%
Federal, 4%


Markets with the most to recover to return to prior peak
Nonresidential construction put-in-place values in 2013 were $562 billion, which is $148
billion (21%) below the peak value of $710 billion in 2008. As some markets peaked in
different years (e.g., Commercial in 2007, Office in 2008, Manufacturing in 2009), we looked
at peak spending in each Census Bureau category regardless of year, which totals $753 billion
and leaves 2013 $192 billion (25%) below prior peak levels if all submarkets returned to prior
peak.
Exhibit 90 breaks down the $192 billion of combined deficit versus prior peak according to
the nonresidential construction submarket. Commercial, Office, Lodging and Education
represent 63% of the required recovery to return construction activity to prior peak levels.
Exhibit 90: Breakdown of $192 billion deficit versus prior peaks in each nonresidential market
Power, 7%
Highway and street
(Public), 1%
Transportation, 0%
Other, 12%
Educational, 14%
Health Care, 5%
Amusement and
Recreation, 4%
Public Safety, 3%
Religious (Private), 2%
Commercial, 21%
Office, 16%
Manufacturing
(Private), 4%

Source: Census Bureau, RBC Capital Markets calculations

May 2, 2014 75
Commercial is recovering with some changing dynamics. The Commercial market is the
largest portion of the delta versus prior peak levels. Private Commercial markets are in the
fourth year of recovery, having grown 9%/9%/8% in 2011/2012/2013 but overall Commercial
grew 10%/7%/6% due to the impact from Public spending, which represents 5% of the
category. As a reminder, the Commercial category includes Automotive (e.g., dealerships,
showrooms, service centers, gas stations, parking); Food/beverage (e.g., supermarkets,
convenience stores, restaurants, bars, liquor stores); Multi-retail (e.g., department stores,
shopping centers/plazas, malls); Other commercial (e.g., salons, florists, dry cleaners). Private
multi-retail and other submarkets represent over two-thirds of the deficit versus prior peak
within the Commercial category. Therefore, to be bullish on Commercial construction an
investor must have confidence in a strong and sustained recovery in the building of shopping
centers, malls, and other stores. RBC recently held a call with the Association of General
Contractors (AGC) economist Ken Simonson. He noted retail spending related to retooling
older malls (e.g., install a Pilates studio instead of a store), along with new retail installed in
the first floor of new apartment buildings, hotels and office buildings. However, the
complexion of the retail footprint will not be the same due to e-commerce, which is driving
investments in warehouses and distribution facilities versus brick and mortar stores.
Education may face prolonged headwinds. The Education market represents 14% of the
total nonresidential market, and a similar portion of the required recovery to achieve peak
spending levels overall. Private spending represents only ~20% of this market, while State &
Local spending is ~75%. This market therefore relies on State & Local construction spending,
which faces several headwinds. While home prices have risen nicely in recent years and drive
local property tax receipts, AGC economist Ken Simonson notes that it takes 2-3 years before
assessors mark up the value of existing homes. At the State level, despite rising revenues for
the last four years, the expansion of Medicaid spending, retiree healthcare costs, and under-
funded public employee retirement plans are limiting the funds available for construction
projects. AGC also notes a slowdown in population growth, less mobility (fewer people
moving to suburbs and requiring new school capacity), a population movement toward inner
suburban/central city areas with school vacancies, and a small decline in college applications
over the last few years. State and Local put-in-place dollars have declined for the last five
years. AGC expects another 1-3 years of decline in government spending as a result.
Office is also recovering, with some impact from Public spending and mix. Public Office
construction spending, which is 20% of the Office market, continued to decline through
2013, leaving total Office growth of -5%/+7%/flat in 2011/2012/2013. Private Office markets
grew 18% and 10% in 2012 and 2013, respectively, following declines of -33%/-35%/-3% in
2009/2010/2011. The cyclical bounce is limited by several factors, in our view. As the AGC
economist noted, tenant improvement spending may help, but the suburban office market is
plagued with very high vacancy rates and little new construction. The nature of the job
recovery is also weighted toward low wage jobs, and square footage per employee appears
to be declining in a broad-based fashion across the market.
Lodging is recovery nicely. Lodging, which is entirely Private spending, grew 28% and 29% in
2012 and 2013, respectively. This submarket appears to be showing the strongest recovery,
but also some of the deepest cyclicality. Lodging declined 28%/56%/25% in 2009/2010/2011.
Momentum in Lodging must be maintained for a strong recovery in nonresidential
construction overall, in our view.
Manufacturing appears set for a healthy cycle. Manufacturing construction is entirely a
Private market that represents 9% of the nonresidential market. Manufacturing is 14% off its
peak in 2009, represents just 4% of the aggregate nonresidential market deficit versus peak,
and is rarely cited in discussions of the nonresidential cycle recovery. Manufacturing grew
18% and 6%, respectively, in 2012 and 2013. Going forward, the build-out of petrochemical

May 2, 2014 76
and chemical processing capacity is a theme we believe will drive manufacturing
construction. AGC notes O&G, Re-shoring, Automotive and Pipelines as key areas of growth.
AGC also discussed the Panama Canal expansion, which is driving expansion of ports on the
Atlantic, Gulf and Pacific coasts, as well as extension of piers and wharves and connecting
infrastructure.
The impediments to returning to prior peak. Our view is that a recovery is already underway
in Private markets, having bounced off cyclical lows, and that a return to prior peak levels
would require improvement in the current growth rates, a growing contribution from
government spending, and a cycle that extends for 5+ years.
In addition to some of the headwinds mentioned in some nonresidential markets we discuss
above, we note a recent comment published by the Cleveland Fed (The Overhang of
Structures before and since the Great Recession, March 28, 2014), with the aim to
understand and explain the slow and lagging recovery in investments in structures. The
paper makes the following assertions:
There is evidence that investments in structures was too high in the years leading up to
the recession and that an overhang of structures has held down investment growth
during the recovery.
The data suggests that overhang built up because of excessive investment before the
crisis, rather than resulting from the unanticipated drop in economic activity during the
Great Recession.
Findings suggest that investment in structures may pick up further in the future, as the
remaining overhang gets absorbed, but it will not likely return to the high pre-crisis
levels.

What are the companies saying?
Non-residential Construction
Company non-res outlooks consolidated around modest improvement. Company
commentary has centered around low- to mid-single-digit growth in non-residential spending
in 2014, with Eaton Corp. the most bullish outlier with its +7%-8% forecast. Outlooks are
generally consistent in expecting continued strength in the industrial vertical, an acceleration
in commercial building, and flattish growth in institutional.
Ingersoll-Rand forecasts the 2014 non-res building N.A. end-market up low/mid-single
digits, with commercial new construction exhibiting moderate and uneven growth. IR
has highlighted an industry forecast for non-res spending that was recently revised from
+6% to +8% for 2014, though noted the forecast has tended to be optimistic. The
industry 2014 forecast includes spending on Commercial/Industrial up 18% (vs. prior
+13% and +8% in 2013) and institutional down 2% (vs. prior -1% and -8% in 2013).
Within Commercial/Industrial, the strongest verticals are expected to be office and bank
buildings along with warehouses and garages. In Institutional, government is expected to
be weak, education and dormitories also down, but hospitals up slightly. In its prior
outlook, IR cited construction starts (expressed in square footage) forecasted up 11%,
with institutional flat.
Eaton Corp. has been among the more bullish companies with its non-residential
construction outlook. ETN expects non-residential spending to grow in the 7%-8% range
in 2014, including continued growth in Industrial (e.g., petrochem plants) and more
growth in commercial (offices, retail) than has been seen in the past few years. ETN has
cited rising property values (and thus tax receipts) to aid state and local spending, along
with strength in residential markets driving urban development.

May 2, 2014 77
Watts Water has cited industry forecasts calling for 8% growth in Commercial
construction spending in 2014, with hotels/offices forecasted up double-digit and
Institutional spending the laggard. Within its own outlook, WTS has said it is hopeful
for a discernable uptick in 2H14.
United Technologies guided to mid-SD growth in its Building & Industrial Services
segment, including low-double-digit growth in Otis new equipment and mid-SD growth
in Commercial HVAC.
Johnson Controls expects non-res construction spending up 2% in the US in 2014 (+1%
Europe) within a 3-5 year growth framework of ~6%-7% CAGR in its Commercial
Buildings end-market. With its 2Q/F14 results, JCI called out sluggishness in its
Commercial HVAC end-market, particularly at the high end and in Institutional markets.
Stanley Black & Decker guided to flat-to-modest growth in its North American Security
business in 2014, with guidance not assuming any dramatic improvement in N.A. non-res
for the year.
Comfort Systems USA has pointed to a continued gradual recovery in non-residential
construction, with expectation that 2014 will be a transitional and investment year in
new construction.
Lennox International forecasts N.A. commercial unitary shipments up low-SD for 2014

We prefer infrastructure-related exposure to nonresidential
construction
Nonresidential construction projects can take over a year to execute, so when more projects
begin, the put-in-place values naturally accelerate, and the recovery appears to be
underway. AIA consensus forecasts show an expectation for total nonresidential spending
+5.8% in 2014 and +8% in 2015. We refer readers to the AIA definitions and exclusions from
the market forecast discussed above for clarifications, most notably that Public spending is
nearly half the market, excluded from AIA forecast, and impacts the overall nonresidential
market growth. Nonetheless, we believe investor expectations are in the similar rangemid-
to high-single digitsand at this point, we believe that the end-market must surprise to the
upside in order to see outsized performance in stocks with direct exposure to nonresidential
construction. We expect nonresidential markets to grow in 2014 and do not dispute that a
recovery is underway. However, we see potential headwinds to upside nonres forecasts
and prefer less direct exposure to commercial or nonresidential construction from a stock
perspective. If the nonresidential cycle has legs for 3-5 years but at a modest/uneven pace,
we believe this logic suggests the capex cycle will continue for several years as well, as we
dont believe a healthy nonres cycle will be met with a capex recession. Stocks with less
consensus expectation for steady growth over the next several years (e.g., EMR, DOV, ROK)
stand to perform well, in our view, on this theme. For indirect themes relative to nonres
construction, we prefer the infrastructure plays that were discussed to a lesser extent in
the context of commercial construction.
Flowserve (NYSE: FLS, Outperform). Flowserve is a later-cycle infrastructure provider of
large engineered pumps, valves and seals. In the economic recovery to date, Flowserve has
received few large original equipment (OE) project orders, but stands to benefit from the
increasing volume of petrochemical/chemical construction in North America over the next 3-
4 years. By end-market, Flowserve generates 40% of revenues from oil and gas and 20% from
chemical. We estimate its OE project proposals were up 15%-20% entering 2014, with
projects in the bid/buy phase up 15%.
Emerson (NYSE: EMR, Outperform). The Process Management segment for Emersion is
~35% of total revenues, offering automation systems/software, measurement devices, and
valves with similar end-market exposure to that of Flowserve. Emerson recently reported
that its March quarter orders in Process Management were up 10%-15% (9%-14% ex. FX)

May 2, 2014 78
year-over-year, with a view of 5%-7% growth through FY2016. Additionally, although
Emerson is a global business with only 45% of revenues derived from North America, we
estimate that the company has ~20% exposure to construction, split evenly between
residential and nonresidential markets. Its residential/commercial HVAC exposure and sale of
other products (motors, drives, professional tools, storage/appliance solutions) should
benefit from improving construction markets. We also highlight the data center market,
which AGC noted as one of the positive trends in nonresidential construction (falls within the
Office category). Data centers represent ~55% of its Network Power segment, and ~10% of
total company revenues.


May 2, 2014 79
Companies Mentioned
Armstrong World Industries, Inc. (NYSE: AWI; $53.44; Sector Perform)
BancorpSouth, Inc. (NYSE: BXS; $23.03; Outperform)
Bank of America Corporation (NYSE: BAC; $15.09; Outperform)
Beacon Roofing Supply, Inc. (NASDAQ: BECN; $35.32; Sector Perform)
Brookfield Residential Properties Inc. (NYSE: BRP; $20.22; Outperform)
Caterpillar Inc. (NYSE: CAT; $105.07; Sector Perform)
CoBiz Financial Inc. (NASDAQ: COBZ; $10.07; Outperform)
Continental Building Products, Inc. (NYSE: CBPX; $16.89; Outperform)
Deere & Company (NYSE: DE; $93.22; Sector Perform)
Emerson Electric Co. (NYSE: EMR; $67.99; Outperform)
Flowserve Corporation (NYSE: FLS; $73.54; Outperform)
Fortune Brands Home & Security, Inc. (NYSE: FBHS; $39.56; Outperform)
H&E Equipment Services, Inc. (NASDAQ: HEES; $37.87; Outperform)
Home Bancshares Inc. (NASDAQ: HOMB; $31.45; Sector Perform)
Ingersoll-Rand Plc (NYSE: IR; $59.96; Sector Perform)
JPMorgan Chase & Co. (NYSE: JPM; $55.72; Outperform)
KB Home (NYSE: KBH; $16.69; Outperform)
KeyCorp (NYSE: KEY; $13.53; Outperform)
Lennar Corporation (NYSE: LEN; $39.37; Outperform)
Lowe's Companies, Inc. (NYSE: LOW; $46.37; Outperform)
M&T Bank Corporation (NYSE: MTB; $121.49; Outperform)
Manitowoc Co., Inc. (NYSE: MTW; $32.28; Outperform)
Masco Corporation (NYSE: MAS; $20.10; Outperform)
Masonite International Corp. (NYSE: DOOR; $55.45; Outperform)
Mohawk Industries, Inc. (NYSE: MHK; $133.32; Outperform)
Mueller Water Products, Inc. (NYSE: MWA; $8.76; Outperform)
Navistar International Corp. (NYSE: NAV; $38.05; Sector Perform)
NCI Building Systems Inc. (NYSE: NCS; $15.82; Outperform)
Norcraft Companies, Inc. (NYSE: NCFT; $15.75; Outperform)
Oshkosh Corporation (NYSE: OSK; $54.94; Sector Perform)
Owens Corning (NYSE: OC; $40.86; Sector Perform)
PACCAR Inc. (NASDAQ: PCAR; $64.09; Sector Perform)
PGT, Inc. (NASDAQ: PGTI; $10.51; Outperform)
Prosperity Bancshares Inc. (NYSE: PB; $58.52; Sector Perform)
PulteGroup, Inc. (NYSE: PHM; $18.53; Outperform)
RE/MAX Holdings, Inc. (NYSE: RMAX; $28.40; Outperform)
Realogy Holdings Corp. (NYSE: RLGY; $42.73; Outperform)
SunTrust Banks, Inc. (NYSE: STI; $37.96; Outperform)
TCF Financial Corporation (NYSE: TCB; $15.44; Outperform)
Terex Corporation (NYSE: TEX; $42.82; Sector Perform)
The Home Depot, Inc. (NYSE: HD; $79.33; Outperform)
The PNC Financial Services Group Inc. (NYSE: PNC; $83.77; Top Pick)
Umpqua Holdings Corporation (NASDAQ: UMPQ; $16.40; Sector Perform)
United Rentals, Inc. (NYSE: URI; $93.17; Top Pick)
USG Corporation (NYSE: USG; $29.80; Outperform)
Vulcan Materials Company (NYSE: VMC; $64.78; Outperform)
Watts Water Technologies, Inc. (NYSE: WTS; $52.81; Sector Perform)
Wells Fargo & Company (NYSE: WFC; $49.64; Outperform)
Western Alliance Bancorporation (NYSE: WAL; $23.04; Outperform)
Zions Bancorporation (NASDAQ: ZION; $28.61; Outperform)

May 2, 2014 80
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Distribution of ratings
RBC Capital Markets, Equity Research
As of 31-Mar-2014
Investment Banking
Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [Top Pick & Outperform] 822 52.49 303 36.86
HOLD [Sector Perform] 654 41.76 170 25.99
SELL [Underperform] 90 5.75 11 12.22

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May 2, 2014 81
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May 2, 2014 82
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